European markets rebounded strongly during April. The April reporting season has been generally supportive for stocks. Markets tend to cope better when furnished with information, and although Covid 19 is having a dramatic short term effect on almost all businesses, investors were generally encouraged by companies reporting strong measures being taken to alleviate financial strain, and reassuring messages that business models are robust enough to withstand any short-term dramatic downturn.
The fund enjoyed a strong month, both in absolute and relative terms. Our holdings which produced results over the month generally enjoyed strong rebounds in share price, as investors were reassured that the long-term prospects for these companies remained good. We have generally been impressed by how efficiently many of our holdings have adapted to the current climate.
BE Semiconductor Industries, a Dutch-based semiconductor equipment manufacturer produced strong results, sending the shares significantly higher. Recticel, which specialises in foams for various applications including insulation, announced the disposal of non-core businesses, and the shares rallied strongly as a result. Proact IT, which specialises in cloud-based data storage solutions also produced very reassuring results. As with our other IT service holdings, these business models are able to function almost completely on a work-from-home basis. Further, clients are generally continuing to invest in areas such as business digitisation, as these types of projects are not deemed “discretionary”, but rather business critical.
On the negative side, Total was weak, as the oil price continued to fall. Nokian Renkaat, a manufacturer of speciality tyres was also weak. It is due to report in early May, and perhaps suffered from lack of newsflow.
We sold a small position in one of our IT service companies, Bouvet, which had recovered sharply, and had run out of valuation support. In its place, we purchased Ordina, a Benelux IT services business we have been monitoring for some time. It has a net cash balance sheet, and double-digit free cashflow yield, in growth markets. We exited our holding in Lastminute.com, the online travel company. This is one of the very few companies in the portfolio where Covid19 has caused the investment case to change structurally and we feel that there are better rebound candidates elsewhere. We also sold our holding in GAM, where recent results showed no stabilisation in AUM, combined with poor investment performance, two of the cornerstones of the investment case.
The coming months will be difficult for almost all businesses. We remain confident that our aversion to financial leverage, combined with our holdings having strong business models capable of generating high levels of free cashflow will deliver good returns, and that these businesses will emerge from the crisis in a strong relative position.