European equity markets were mixed over the month. The banking sector was rocked by the collapse of Silicon Valley Bank in the US. In Europe, this led to a further deterioration in confidence in Credit Suisse (perceived as a problem-prone bank for some time now), and the subsequent takeover by UBS of the stricken bank. Interest rate peak expectations have now been lowered generally. This led to very mixed markets, with growth-type stocks performing more strongly (longer duration investments tend to do better in lower interest rate environments). Smaller companies lagged their larger peers and ended the month in negative territory, versus the broad market which posted modest gains.
The fund was marginally lower over the month – not surprising, given the large weighting in smaller companies. When smaller companies suffer because of macro concerns, we tend to view it as an opportunity.
The fund benefitted from a bid approach for one of our IT service holdings, Ordina. Zaptec (electric vehicle charging) was also strong on news that a competitor product had been withdrawn on safety concerns, plus Zaptec received accreditation to launch in Germany, a potentially significant market. There were also strong performances from Rheinmetall (defence), Brunel and Amadeus Fire (both staffing). ASM International and BESI (both semiconductor equipment manufacturers) were also notably stronger over the month.
In terms of detractors from performance, the fund’s holdings in Financials suffered as a result of the aforementioned concerns in the banking sector. Enad Global (gaming), and Visiativ (IT services) were also lower on profit-taking following recent results. Var Energi, Vallourec and Schoeller Bleckmann (all Energy and Energy Services businesses) were also weaker over the month.
In terms of activity, with the interest rate outlook changing and with regulators likely to take a more critical view of capital returns, we reflected on this and decided to sell one of our banking holdings, Bawag, the smallest bank amongst our holdings.
We exit the first quarter of the year with the portfolio attractively valued. On a 6.6% free cashflow yield, for 10.5% expected growth, these metrics are some 40% and 90% above the broader market free cashflow yield and growth metrics respectively. At the aggregate level, our holdings are debt free (net debt to EBITDA for the portfolio is zero), versus the market at 1.3x. This lack of financial leverage gives us confidence that our investments, particularly our smaller companies will be able to prosper even in turbulent economic times.