European markets fell heavily over the course of the month as markets grappled with Covid19 and the resultant collapse in economic activity.
The fund was down in both absolute and relative terms. Growth had its biggest relative monthly outperformance over Value in history, therefore having a valuation discipline, over this short period, did not help our performance. Further, our small and mid-cap bias also meant that many of our holdings didn’t fully participate in the first wave of markets rebounding. Given our unchanged conviction in these names we fully expect to recoup this performance and have been adding to many of them. Our small cap names in particular have investment cases which include net cash balance sheets, big management stakes and possibility of corporate action. Of course, these features don’t necessarily help on a very short time frame.
Stocks which outperformed over the month consisted mainly of our staple-like holdings and pharma stocks.
Two particular segments were noteworthy detractors from performance. Firstly, a combination of exposure to 2 oil service companies and 3 other Norwegian stocks (Bouvet, IT Services, and 2 Salmon farmers). Secondly, there was fairly indiscriminate selling among our IT services holdings. These companies remain well capitalised businesses with net cash balance sheets in almost all cases. Flexible cost bases and adaptability to work from home are also attractive features.
In terms of activity, we have again improved the long-term growth profile of the portfolio on very reasonable free cash flow valuation metrics. This month, we added Adidas, Barco (display technology) and Reply (IT Services). All have net cash balance sheets and we expect them to be market share gainers over the crisis. We also topped up or ‘promoted’ a number of our small and mid-cap holdings. On the sell side we took out an oil service stock and a bank (Subsea7 and Santander) as we judged the balance of opportunity better elsewhere. We also reduced some of the staples and pharma stocks which have performed so strongly. In short, we have followed our process.
The elevated cash level at month-end reflects an inflow on the last day of the month.
We are well positioned for cyclical and structural change. A recession typically signals the end, not the beginning of a bear market and is usually associated with a change in leadership. Many of the structural narratives of the last decade will change - monetary policy dominating fiscal policy, the bond bull market, investors love affair with quality and growth at any price.