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MI Chelverton European Select Fund – Monthly Manager Commentary – December 2022

MI Chelverton European Select Fund – Monthly Manager Commentary – December 2022

European equity markets were mixed over the final month of the year, but broadly unchanged at the aggregate level. Smaller companies, which have endured a difficult 2022, enjoyed some outperformance of broader indices during the final month of the year.

The portfolio produced a positive return during December, helped by its exposure to smaller companies and their outperformance, as noted above.

Notable contributions to performance over the month came predominantly from a number of our smaller companies, across a range of sectors. Strong share price performances from Siili Solutions, Neosperience, Infotel and Bouvet (all IT services), plus Recticel (insulation) and Kaufman and Broad (housebuilder) were all noteworthy contributors to performance. Away from our smaller companies, there were also strong performances from Vallourec (Energy transition services) and ALD (vehicle leasing).

The largest detractor from performance came from Fugro (Energy transition services) following the resurfacing of historic issues regarding works carried out by Fugro on a legacy project. Fugro have already been cleared of any wrongdoing, but the issue is emotive and led to the share price decline. Elsewhere, Huddly (camera/meeting room technology specialist) was weak despite no news from the company. Kering (luxury brands, including Gucci) also had a negative share price performance, as investors continued to fret over China lockdown effects.

Over the month, the fund invested in two businesses which are exposed to the alternative energy sector. OX2 is a service provider to the wind and solar energy sectors. With over 70 projects developed to date, it is profitable, cash generative and has a significant net cash balance sheet. Erredue is a manufacturer of gas generators and is exposed to “green hydrogen” production. Also profitable, with a healthy net cash balance sheet which will allow it to scale its business significantly over the coming years.

As we enter 2023, the portfolio’s valuation metrics continue to be very attractive in our view. The free cashflow yield exceeds 7%, which represents a premium to the market of over 30%. For this, we are expecting average growth rates for our companies of just under 10%, versus broader market growth of just under 5%. In terms of financial discipline, the net debt/EBITDA ratio of the fund is very low, at 0.1x, versus the market on 1.3x. We believe, based on these attractive metrics, that the portfolio enters 2023 in good shape.