European equity markets were lower during August, as the bullish sentiment observed in the previous month began to lose traction. Investor concerns returned to inflation, combined with stalling growth, causing European markets to give up some of July’s gains. There was a degree of reversal stylistically, with value outperforming growth over the month. Smaller companies continued to lag broader indices in terms of performance.
The fund was also lower over the month. A number of our smaller companies have underperformed markets in recent months, in terms of share price performance, and this has been a drag on short term performance. We view this as a significant opportunity and have been using recent share price weakness to add to a number of our holdings.
In terms of positive contributions, several companies in what we think of as our “scarce resources” cluster performed well over the month, including Vallourec (pipe supplier to the oil and gas sector), Var Energi (Oil and Gas E&P), TGS (seismic data provider to energy sector) and Shell (integrated energy). Also noteworthy was Limes (well-being clinics), which produced very positive results.
Some of our smaller companies (as per comments from above) were detractors from performance. Brunel (personnel provision for Oil and Gas/Minerals sectors) was weaker despite very strong results. Ordina (IT Services) was similarly weak, despite a positive update. Kaufman and Broad (French housebuilder) was also notably poor in share price terms over the month even though it had provided a reassuring update in July. All these companies either have no debt or net cash balance sheets, and we continue to believe that they are attractively valued from a cashflow perspective. Elsewhere, industrial companies performed poorly generally, given perceived cyclicality, and the fund was not immune to the poor sentiment towards this area – Kone (elevators and escalators), Signify (Lighting) and Knorr Bremse (transport braking systems) were all notably weak over the month.
During the month, the fund exited Prosus (Investment vehicle with significant stake in Tencent), following a strong recovery in share price in recent months. We also exited our holding in Swedish Match, following its bid approach from Philip Morris. We reinstated Valmet (high quality Finish engineer), which we had exited over a year ago. With shares down almost 30% since we exited, the valuation is more compelling, and we are looking forward to “making money with old friends”.