Key takeaways
1. The fund slightly underperformed its benchmark and peers
Class A shares slightly underperformed the MSCI Europe Index and the Morningstar Europe Stock Category average. Stock selection was slightly negative on a sector basis and positive on a country basis.
2. Bottom-up stock selection focused on EQV (Earnings, Quality, Valuation) characteristics
During the quarter, we initiated four new positions and exited two stocks based on our EQV fundamentals. A focus on actively managed, bottom-up stock selection drives the fund’s sector and country allocations.
3. We remain focused on a long-term investment horizon
Regardless of the macroeconomic environment, we remain focused on applying our well-established, long-term, bottom-up EQV investment process that seeks to identify attractively valued, high-quality growth companies.
Manager perspective and outlook
- Global equity markets managed to deliver gains for the quarter despite volatility and a banking crisis. January’s rally gave way to mixed global equity results in February as inflation appeared more persistent, boosting expectations that interest rates will stay higher for longer. The quarter’s largest shock came in March as the failure of two US regional banks, along with the subsequent UBS takeover of Credit Suisse, led to a selloff in US and European financial stocks. Amid the banking turmoil, some global central banks continued to raise interest rates to fight inflation.
- Rising interest rates, combined with recent banking trials and rescues, have caused investors to worry that credit standards will tighten, increasing concern about a potential global recession. Simultaneously, the US Federal Reserve has indicated it may now be nearing the end of its interest rate hiking cycle, while market participants anticipate the Fed will begin cutting interest rates by summer 2023. With global macroeconomic and geopolitical uncertainty at elevated levels, investors seem to be renewing their focus on traditional investment fundamentals. This increased emphasis could prove beneficial for our balanced EQV philosophy (conservative/sustainable growth with a quality orientation and valuation discipline).
Portfolio positioning
During the quarter, we initiated positions in the following stocks:
RELX (RELX, Financial) is a British high-quality information services publisher that has gone through a decade-long transformation away from legacy print toward higher growth/value-adding digital, data analytics and decision-making solutions. We believe RELX is an improving organic growth story. RELX’s valuation discount to its peers in the global professional services segment gave us the opportunity to step into this high-quality company led by a good management team with a history of value creation.
Publicis Groupe (XPAR:PUB, Financial) is a French multinational advertising and communications company. After adifficult period of substantial pricing pressures and market share losses to digital advertising companies and closed operating systems, we believe Publicis is emerging as a better-positioned global agency with favorable exposure to data and technology assets.
Capgemini (XPAR:CAP, Financial) is a French information technology consulting and outsourcing firm. The companyprovides services including strategy, consulting, technology, engineering and outsourcing to a broad array of end markets. Capgemini has been trading at a discount due to the deteriorating macro-economic environment. We believe Capgemini is in a better position to manage adversity today than during the 2008 global financial crisis given management’s ability to reduce expenses, its history of cash flow generation and healthy financial position.
Serco (LSE:SRP, Financial) is a British global government outsourcing contractor strongly linked to the defense andimmigration sectors. Rising geopolitical tensions support demand for the company’s services going forward as in-house government resources are increasingly stretched thin. The stock’s valuation has remained at a meaningful discount to historical trading despite improved earnings quality.
We sold the following securities:
Logitech International (LOGI, Financial) is a Swiss multinational manufacturer of computer peripherals andsoftware. A deteriorating earnings outlook due to soft demand for video collaboration, webcam and gaming peripherals led us to exit the position and redeploy capital into better EQV opportunities.
Husqvarna (OSTO:HUSQ A, Financial) is a Swedish industrials company specializing in forest and garden products andservices. We sold the stock following sharp gains in the first quarter as cyclical stocks performed well and a large shareholder took a stake in the business. We felt Husqvarna’s high valuation combined with low visibility of future earnings created an opportunity to redeploy capital elsewhere.
Performance highlights
Stock selection in materials, consumer staples and real estate were among the largest contributors to relative results. Geographically, fund holdings in Ireland, Norway and the Netherlands outperformed those of the benchmark, adding to relative return. Overweights in Ireland and the Netherlands were advantageous as well. Conversely, stock selection in financials, information technology (IT) and communication services were the largest detractors from relative results. An underweight in IT also hampered relative return. Geographically, stock selection in France and exposure in Hungary and Turkey detracted from relative performance.
Contributors to performance:
LVMH Moet Hennessy Louis Vuitton (XPAR:MC, Financial) is aFrench luxury goods company that reported robust fourth quarter 2022 earnings with better-than-expected top-line sales growth across its key divisions. LVMH has also benefited from China’s reopening as its citizens, who are traditionally strong buyers of luxury, return to stores after strict lockdowns.
Danieli & C. Officine Meccaniche (MIL:DAN, Financial) is anItalian supplier of equipment and physical plants to the metal industry. Danieli posted robust results alongside a growing orderbook. The company’s valuation remains attractive, and we believe it is well-positioned to take advantage of nearshoring trends and the need for less polluting steel production. Heineken (XAMS:HEIO, Financial) is a Dutch global brewer with ahigh exposure to both emerging market growth and consumers’ growing preference for premium brands.
Detractors from performance:
IG Group (LSE:IGG, Financial), a British global online tradingcompany, delivered results in line with analyst estimates for the quarter and confirmed management’s full year forecast. However, online trading has softened since the COVID boom, so growth numbers may face challenges in the short term. FinecoBank (MIL:FBK, Financial) is an Italian low-cost assetmanager, large brokerage house and bank. The stock was affected by the general selloff of European financial stocks.
Haci Omer Sabanci (IST:SAHOL, Financial) is a Turkish financialand industrial conglomerate. The stock was affected by weakness in the Turkish market. After a major earthquake hit Turkey and Syria in February, Turkey’s stock exchange was closed for a number of days to prevent a selloff. Soaring inflation has also hindered Turkey.
Holdings are subject to change and are not buy/sell recommendations. Attribution methodology notes: The attribution provides analysis of the effects of several portfolio management decisions, including allocation and security selection. Securities classified as “Other” may include non-equity securities, derivatives, and securities for which a sector classification may not be appropriate. The portfolio is actively managed and portfolio holdings are subject to change. The percentage weights represented for the portfolio are dollar weighted based on market value. Market allocation effect shows the excess contribution due to sector/market allocation. A positive allocation effect implies that the choice of sector weights in the portfolio added value to the portfoliocontribution with respect to the benchmark and vice versa. Selection effect shows the excess contribution due to security selection. A positive selection effect implies that the choice of stocks in the portfolio added value to the portfolio contribution with respect to the benchmark and vice versa. Total effect is the difference in contribution between the benchmark and portfolio. Past performance does not guarantee future results.
