European markets were strong again in May. It was very much a month of two halves. The first few weeks of the month were dominated by outperformance of the market leaders of recent years, namely quality and growth companies. The latter part of the month saw the beginnings of a rotation where cheaper companies started to perform best, especially more cyclical names, as Europe began to exit lockdown and markets began to look forward to economic recovery combined with the unprecedented levels of fiscal stimulus committed by Governments across Europe.
The fund enjoyed a strong performance, especially in the latter half of the month. There was little in the way of corporate newsflow, as the first quarter reporting season was largely completed in April.
Amongst our best performers were technology holdings such as Reply and Proact. The outperformance of more cyclical areas of the market also lifted our Financials holdings, with ING in particular performing strongly. SEB (kitchenware) and Adidas also performed strongly as both reported good recovery in their Chinese businesses post lockdown.
There were very few companies in the portfolio which did not participate in the rally, although some of our more defensive holdings in areas such as pharmaceuticals understandably lagged the market over the month.
The fund purchased Ahold Delhaize over the month. A top ten global food retailer, the total shareholder return comprised of buybacks and dividends should be between 6% and 8% annually. On a free cashflow yield of 8% for solid annual growth, the valuation combined with the expected shareholder returns is an attractive combination.
We sold our small holding in Bank of Ireland, preferring instead to consolidate our financial holdings into more robust businesses, topping up holdings in UBS and Svenska Handlesbanken.
Much of the debate at the moment is focussing on the shape of economic recovery – with V-shape currently being the most popular expectation. While we cannot predict the shape of recovery, it will indeed happen. This should lead to a change in leadership, with more expensive quality/growth companies likely lagging cheaper, more economically sensitive ones. Balance sheet strength, we feel, will still be an important factor for companies which may well face difficult trading periods, at least in the short term. With a net debt to EBITDA ratio of our holdings of 0.3x on average, versus the market currently on 2x, we are confident that even our more cyclical businesses will be able to weather the storm. Our strong valuation discipline, looking for an attractive balance of value and growth will also be a positive factor. The portfolio currently enjoys a 41% free cashflow premium to the market (6.2% vs 4.4% respectively), while being invested in strong companies capable of delivering growth.