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 rebound in European equities lost steam in July. Markets stalled despite improving economic indicators and better than expected corporate earnings (albeit from a low base). The Fund performed in line, benefiting from a materially positive contribution from frozen bakery leader Aryzta. Its share price rallied by 35% on the back of further increased shareholder activism and the report of an unsolicited offer.

In July we invested in small cap Swiss solar technology company Meyer Burger (CHF360m market cap post rights issue) by participating in the significant and strategy changing capital increase. Over the last decade this company has become the leading supplier of industry-standard PERC solar cell equipment technology: over 60% of the global solar cell production capacity installed base is Meyer Burger’s PERC equipment. It sold over CHF3bn of equipment since 2012 but burned through CHF500m of cash and did not make money in any of those seven years.

Today, the company has developed its next generation solar cell equipment technology, which delivers very disruptive solar cell efficiency gains. In order to capture the full value and the competitive advantage this intellectual property brings, Meyer Burger decided to change strategy and enter itself into the solar cell and module manufacturing industry (i.e. vertically integrate the industry value chain). Management plans to have an annual cell capacity of 1.4GW equivalent by late 2022 through an upfront investments of CHF150m, funded by the mentioned equity raise (CHF160m), and a further CHF260m of investments in 2021-2022 (funded out of cash flow and debt). By then, the company should generate over CHF400m in sales and, on our estimates, an underlying free cash flow of CHF80-85m. This implies a valuation multiple of less than 4.5x free cash flow. The ambitions are to triple in size (and cash flow) by 2025/26.

A business that starts to compete with its own customers usually is not appealing to us. But we like this investment case for a number of reasons. Firstly, Meyer Burger is in control of its own destiny because it owns the intellectual property and the competitive advantage (until a new disruption happens). Secondly, the company has operational experience in running production as it always installed and test ran its customers’ new capacities. Thirdly, the photovoltaic market is a structurally growing market. Finally, Meyer Burger has already received written letters of intent from several end customers to purchase annually 2GW of cells and modules per year, the equivalent of 1.4x times the 2022/23 planned capacity, thus the commercial risks seem very favourable. With technology, operational and commercial risks favourably aligned, we feel comfortable with the execution risks.

Despite the potentially positive implications of a Huawei ban in Western 5G telecommunication networks and a long-expected 5G capex tailwind, we sold our position in Nokia. Its share price has recovered well this year and its valuation still appears not demanding. We have been patient investors in Nokia. However, over time ‘conceptual’ technology risks have become ‘real’ risks. High-speed 5G brings the promise of next-generation network services. With millions of devices extending the network, 5G also introduces standard-based interfaces between hardware and software (which is needed to manage all these new network devices) and this disaggregation allows components of the telecommunication network to be virtualised. Just as happened in traditional IT networks, 5G’s network virtualisation ‘solves’ the lack of vendor choice in equipment (standard hyperscale technologies can enter the network), it removes hardware vendor lock-in risk, and it also dramatically reduce network management costs. Overall, capex and operating costs can be halved. Initially, incumbent operators have been in denial or sceptical, but new mobile start-ups like Rakuten (in Japan) and recently Dish (USA) are building out end-to-to end virtualised cloud-native mobile networks on the promise of strong competitive advantages. There is little or no involvement of the traditional telco equipment vendors in these projects. As more pure cloud-native operators will emerge in a typical 3-4 player market – for instance in Germany, the number four operator, Drillish/United Internet (owned by the Fund), is to announce a similar architectural decision soon for its to-be-built network; mobile incumbents will be forced to follow suit. The implications for the traditional telecom equipment hardware vendors cannot be positive.

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.