The Fund aims to achieve long-term capital appreciation by investing in the equity securities of companies listed primarily on exchanges in Europe, including the UK.

Whilst the world and its media remained in the firm grip of the Covid-19 pandemic and the imposed social and economic lockdowns trigger a self-induced economic recession of unknown proportions, equity markets continued to recover strongly in April. From their mid-March lows, stock markets have now rallied by over 20%. Central bank and government economic stimulus packages were expanded, and the rates of new daily infections progressively declined in many countries – the intended positive effect of the mid-March lockdowns – providing the foundation to start planning for an easing of restrictions in most European countries. 

The Fund outperformed its benchmark, mainly benefiting from strong stock-specific contributions. Two material positive performers were French publishing and travel retail conglomerate Lagardere and Dutch natural ingredients provider Corbion. 

The latter’s share price recovered strongly (+20%) as first quarter results proved the Covid-19-induced share price fall to be unwarranted. With Lagardere, however, speculative action was the main driver of share price performance. With over 40% from earnings coming from travel retail (in public transport locations and airports), Lagardere’s share price was unsurprisingly hit hard in February and early March. But from the mid-March lows, its share price doubled back to the pre-lock down levels as activist shareholders proposed radical changes to the board and the company’s ‘commandite’ structure. The incumbent board reacted by mobilising ‘friendly’ new high profile investors to join and defend their position. Whilst we are in favour of the activist agenda, Lagardere’s fully restored share price and valuation led us to sell our investment (+55% in April) and reinvest part of the proceeds in existing investments that are also directly affected by Covid-19, e.g. Elior (school and corporate catering) and JC Decaux (out-of-home advertising), but whose share prices have barely recovered.     

We also completed/purchased three new investments over the month, exploiting cyclical valuation opportunities created by the economic dislocation: Randstad (temporary employment and HR services), Continental AG (# 2 automotive component supplier) and Infineon (semiconductors). This economic downturn is unprecedented, and the speed and slope of recovery are big unknowns. It is also important to consider that, in the short term, the furlough schemes introduced by several governments will help significantly cut negative operating leverage in the current, most painful, quarter. 

With these investments we are focusing longer term on companies that are leaders in their respective industries, that generate over-the-cycle after-tax returns of 20+%, and trade on mid-to-high single-digit mid-cycle free cash flow multiples. Whilst the Randstad investment case is a simple mid-cycle margin valuation exercise that indicates 50+% upside to intrinsic value, both Continental and Infineon are strongly positioned to exploit structural growth trends of digitisation/electrification in their respective industries, adding growth visibility to their value cases. They therefore offer more upside longer term, especially Continental with 90% upside potential, in our view, and Infineon with 60% upside potential, based on our analysis.

These new investments increase the ‘quality’ percentage exposure of the Fund (high after-tax return business models) but also cyclicality. However, given where we are at this point in time and the price cycle, we believe the risk/return balance to be very favourable for the patient investor.  

JOHCM/MSCI Barra/FTSE Group/Bloomberg/Lipper.

Data shown net of fees, net income reinvested.Please note that fund performance is shown against the MSCI Europe NR 12pm adjusted in GBP. Performance of other share classes may vary and is available on request. Data for the period 7 May 2003 to 31 December 2012 is shown against the FTSE Eurofirst 300 TR Index. 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 Funds investment include shares in small-cap companies and these tend to be traded less frequently and in lower volumes than larger companies making them potentially less liquid and more volatile.