European markets enjoyed a positive final month of the year, finishing close to their highest levels over the year. Macroeconomic concerns receded somewhat, as it appeared that the US and China had reached an initial level of agreement on their ongoing trade negotiations.
The fund performed strongly over the month. Despite the positive performance enjoyed by European markets and the fund over the year, we continue to see the fund as attractively valued, with a material free cashflow yield premium to the market (5.8% vs 4.3%).
In terms of positive contributors, CPL Resources, the Irish-listed recruitment consultant, had a very strong share price performance over the month. This was partly driven by its UK exposure in the wake of the landslide Conservative victory. The valuation remains compelling to us, with over 20% of the market cap now in cash, and a free cashflow yield approaching 7%. Arcadis, the global engineering consultancy, also enjoyed a positive month, driven by closure on a legacy issue involving a Brazilian power plant project. Again, despite the strong performance, the valuation remains very attractive, with good growth prospects, and a free cashflow yield of almost 7%.
On the negative side, Saras, a leading European oil refining business was weak for a second month. Saras is expected to benefit from the introduction of IMO2020 this year, environmental legislation which promotes lower sulphur fuels, benefitting refiners such as Saras which focus on lower emission products. We have added to the position. Group SEB, a global manufacturer of cooking and food preparation products, was also weak, suffering from sentiment towards general industrial action which occurred in France during the month. We believe that the prospects for SEB, particularly in areas such as the Far East, are compelling, and have been adding to this relatively new holding.
Alongside the high relative free cashflow yield of the fund, our investments in aggregate have solid growth prospects, giving us confidence that while we are retaining our valuation discipline, we are not straying into investments which have significant structural challenges i.e. cheap for a reason or value traps. The fund’s holdings, in aggregate, also have much lower financial risk than the market, as measured by net debt to EBITDA.
Sentiment in European equity markets has generally moved from glass half empty to glass half full as the year progressed. While valuations generally are higher, we are confident that there remain undervalued investment opportunities. We will continue to apply our valuation discipline, combined with an aversion to excessive financial risk, in order to identify undervalued cashflows.