Timing of the rebound

Overall, the market remains highly correlated to inflation and rising interest rates. This context penalises the relative performance of growth companies. Given their decline, we note that the 2022 P/E levels of a number of stocks in our portfolio are now lower than in 2018, while the 10 Yr US government bond rate is at the same level (around 3%).

Fund Commentary
15 Jun 2022

Overall, the market remains highly correlated to inflation and rising interest rates. This context penalises the relative performance of growth companies. Given their decline, we note that the 2022 P/E levels of a number of stocks in our portfolio are now lower than in 2018, while the 10 Yr US government bond rate is at the same level (around 3%).

EssilorLuxottica for example, de-rated 15% compared to 2018, Puma’s derating is 21% and Sartorius’ 38%. Looking ahead to 2023, these discounts are even wider.

We feel that current prices offer interesting entry points. The timing of the rebound in these stocks will likely depend on the easing of inflationary pressures, particularly in terms of wages.

Recent announcements from Walmart and Target indicate that US consumer spending is beginning to slow, and companies such as Microsoft, Tesla, Meta and Apple are moderating their hiring. The tightening of monetary policy in the US and Europe should have a negative impact on growth, all of which could weigh on inflation.

In May, against a backdrop of significant underperformance in the Quality / Growth area, the Strategic Europe Quality Fund declined by 4.50%. Sector allocation and stock selection both detracted from alpha, costing 125 bps and 272 bps respectively.

Our absence from the Energy, Financials, Pharma and Utilities sectors has been one of the main drivers of underperformance since the beginning of the year. Our overweight in Consumer Discretionary, IT and Industrials are also an obvious drag on performance as these three sectors are the bottom performing sectors in 2022 to date.The top contributors of the month were Nexans, Michelin, Sartorius, Rational and Danaher. On the detractor side, Richemont reported lower-than-expected quarterly results. Although the top line remained healthy, the company reinvested heavily, releasing an operating margin below expectations and likely, somewhat capped going forward.

In addition, the exit from YOOX Net-a-Porter, a key element of our rerating case has been postponed – we sold our position. Kingspan, Publicis, Croda, EssilorLuxottica and Teleperformance underperformed, although their operating performance remains strong. We remain optimistic about these positions.

As always, we invite investors and prospective investors, to get in touch should you wish to discuss the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

The views and statements contained herein are those of Phileas Asset Management in their capacity as Investment Adviser to the Fund as of 10/06/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.