European markets recorded modest gains throughout July. The market was predominantly focussed on the company reporting season which got underway during the month. Company results have been mixed, with more economically sensitive/cyclical businesses generally alluding to market conditions becoming tougher.
The fund also recorded modest gains over the month. Amongst the best performers were our holdings in the semiconductor area – ASM International, BE Semiconductor Industries and ST Microelectronics, as the market renewed its optimism that the current downcycle is showing signs of abating. We took advantage of the strong share price performances to take some profits in this area, though retain our enthusiasm for these businesses. Saras, an oil refining play, also rose on positive results and we have been adding to our position. Arcadis, a global engineering consultant also performed well, following strong results, as did our holding in Kaufman and Broad, a French housebuilder.
On the negative side, Ringmetall, a leading container fastenings business, lowered profit forecasts due to the poor economic climate. Knowit, which forms part of our IT services cluster also produced lacklustre results, sending the share price lower.
Two new purchases were made over the month. Swedish Match is a manufacturer of tobacco products, with the majority of its products focussed on smokeless products (snuss, snuff and chewing tobacco). It has developed a range of tobacco-free nicotine pouches which are experiencing very high demand. The business is strongly cash generative, with a higher free cashflow yield than the market plus higher expected revenue growth. The fund also initiated a holding in Infotel, a French IT consultant. Very attractively valued, with a dividend yield of 4%, a free cashflow yield approaching 7% and expected revenue growth of over 7%.
We exited two holdings over the month, selling Leonardo, the Italian aerospace and defence business, following a strong recovery in the share price over the last 6 months. ISS, a contract cleaning company, was also sold over concerns of a recent aggressive use of factoring to flatter cashflows.