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.

The start-of-the-year rally in European equities, triggered by slowing inflation and stabilising to improving economic conditions, accelerated in March, and the MSCI Europe returned 3.75%. The Fund was unable to keep pace and returned just 1.87%. Apart from a strong contribution of fund heavy-weight Oracle (stock 12% in the month on good results), no stock-specific events or performances stood out. 

We invested in German family-controlled lubricant producer Fuchs Petrolub (market cap €5.4bn). The company produces industrial and automotive lubricants and greases and generated €3.5bn of sales in 2023. Fuchs is a global top-10 player and the largest independent lubricant player: the large competitors are part of integrated oil majors. Fuchs focuses on ‘high tech’, niche lubricant markets for application-specific and tailormade solutions. It sells over 10,000 lubricant specialities to over 100k customers. Just over half (56%) of sales are for industrial applications (fluids for metal forming, cutting and grinding, anti-corrosion), and the rest (44%) is for automotive applications (of which 50% are light vehicles (cars)). A well-diversified customer base (by industry and geography) reduces cyclicality (e.g. in 2020, sales declined by only -7.5%), and Fuchs’ focus on innovation and niches drives market share gains, growth, and healthy profit margins and returns. In 2023, Fuchs’s EBITA reached €429mn (or 12.2% EBITA margin) and these earnings are achieved on €1.5bn of tangible capital, implying pre-tax tangible ROCE of more than 28%. The assets are well invested - Fuchs completed a major €600m geographic expansion program in 2020, just when global demand stalled – which implies significant spare (earnings) capacity: management targets €500mn EBIT in 2025. As implied by its high tangible ROCE, Fuchs is very cash-generative. The company is in a net cash, which adds optionality. Yet, despite its high quality, the ordinary shares (which the family controls) trade on less than 12x 2023 reported free cash flow. Markets worry about the market trend towards electric vehicles, with Fuch’s 22% sales exposure to the internal combustion engine (ICE) car market. The market ignores, however, that electric cars require new, high-value-added battery cooling and transmission fluids, which can allow ‘liquids engineers’ such as Fuchs to grow sales content per vehicle (vs ICE). This net opportunity of e-mobility will become clear over time and revalue this quality company to its true intrinsic value, which we estimate to be €8bn (i.e. +48%). To make room for high-return Fuchs Petrolub, we sold regulated-return utility Enel. 

This year’s market rally so far has been aggressive but merely contained to a narrow ‘large-cap growth club’. For four years now, valuation seems not to matter. And value polarisations are extending into new dimensions. Firstly, a historic high valuation gap between ‘quality’ and ‘classic value’ was established in 2019, when EU short and long-term interest rates turned negative, and this valuation gap persists even though today, interest rates are firmly back in positive territory and rising. New, in the last few quarters, has been the built up of unprecedent valuation discount between EU small caps versus large caps. Markets are on record highs, but these two anomalies explain why bottom-up stock pickers like us can find a portfolio of stocks that offer historic valuation upside! With a weighted average upside of +151%, the Fund’s upside is almost on par with historical milestones of March 2009 and March 2020.
 

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.