After a Covid-induced setback in November, subsequent data confirmed the much lower severity of the new Omicron variant. Equities took relief and bounced back sharply from mid-December to finish the month at +5.69%, matching their November highs. European markets returned +24.89% in 2021. With pandemic disruptions remaining a reality for the time being, the equity recovery was less pronounced for ‘re-opening’ stocks, largely explaining the Fund’s lagging performance in December as well as the full year. There were no material (negative nor positive) stock-specific events or contributions to report.

The equity market story of 2021 really started in 2019, when European government bond yields turned negative (in May 2019). The pandemic injected an additional bond buying booster, and each pandemic wave now is recharging bond buying, pressing yields down and directing (passive) equity flows further into stocks with proven growth track records, irrespective of valuations. ‘Accidental’ money flows into equities are compounding and widening valuation distortions, and implicitly require that economic imbalances and irrationalities (negative interest rates) stay.
 
In a relative world there are always stocks that look cheaper than other stocks but we follow an absolute strategy that values companies’ cash flows in their own right at a 9% required equity discount rate for un-levered cash flows with market average volatility, an unaltered assumption since inception of the strategy. Whilst markets extrapolate current irrational financial conditions, by using a 9% discount rate, we extrapolate rational financial conditions. We do not make a call on low inflation, high inflation or no inflation, we just make the call that nominal risk-free interest rates will have to turn positive in Europe: respect for capital (i.e. reward) is critical to sustained economic growth…
 
Portfolio activity was limited in the last month of the year. By our calculations the portfolio’s upside remains significant and has actually increased slightly as we moved even more capital to pandemic disrupted business, adding to existing names such as Heineken, Metro AG, Danone, ThyssenKrupp, Grifols and new investments such as Swatch Group. At the same time we sold out of fully overvalued quality names such as Wolters Kluwer, Schneider Electric and SIG Combibloc amongst others. We see substantial value in pandemic-hit cyclicals and defensives, they can be ‘quality' or ‘classic’ value and they are now almost two thirds of assets. This exposure (the category broadly moved sideways in 2021) held back the Fund’s performance in 2021 but in the current market context we believe should set the Fund up well going forward.

Data shown net of fees, net income reinvested. Please note that all fund performance is shown against the MSCI Europe NR 12pm adjusted. Performance of other share classes may vary and is available on request. Where shown, monthly returns table shows compounded discrete monthly performance.

Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. 

The investments underlying the Fund do not take into account the EU criteria for environmentally sustainable economic activities within the meaning of the Taxonomy Regulation (Regulation (EU) 2020/852 and amending Regulation (EU) 2019/2088).