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MI Chelverton European Select Fund – Monthly Manager Commentary – February 2020

MI Chelverton European Select Fund – Monthly Manager Commentary – February 2020

European markets and the fund were sharply lower in February, driven by increasing unease concerning the potential spread of Coronavirus. Markets had been fairly sanguine about the spread of the virus, but towards the end of the month, there were some signs that markets were getting more concerned about the virus spreading through Europe and the US, in the wake of Italy quarantining northern areas of the country.

We have no great insight into the duration or severity of the economic or corporate impact. However, we think it is appropriate to assume a base case of one to two quarters of severe impact on economies and our holdings. To this end, we are stress testing our holdings to ascertain possible areas of balance sheet stress in the event of prolonged disruption. Whilst the portfolio will certainly not be immune to these issues, we draw some comfort from the fact that net debt as a percentage of EBITDA is much lower generally for our companies than the market, which should give them some financial breathing space in the event of business disruption. Net debt as a percentage of EBITDA at the portfolio level is 0.3x, compared to the market at 1.6x. We feel that balance sheet strength will be a key issue for markets as the full effect of the virus becomes more apparent.

Market dislocations can provide opportunities to improve the quality and long-term growth prospects of the portfolio, by adding companies which hitherto have been just out of reach on valuation grounds. To this end, we have initiated a holding in Moncler, the Italian luxury goods company. It is our first purchase in the luxury space – strong long-term demand driven by aspirational consumption. A small company in a consolidating sector, with a net cash balance sheet, significant long-term growth prospects and a free cashflow yield which we see as attractive following the inevitable recent share price fall. We have also been topping up a number of our holdings where we see the growth prospects combined with cheap cashflows and robust balance sheets are increasingly more attractive.