European markets were generally weaker again during November. The ongoing uncertainty caused by a number of macroeconomic issues (cyclical fears, trade wars, geopolitical uncertainty etc) continues to weigh on sentiment. European markets remain volatile and directionless. There has been a significant flight to perceived safe havens – companies which are not correlated to any form of economic cycle. Thus, areas such as Pharmaceuticals, Utilities and Telcos have performed well. We have a number of holdings in Pharmaceutical companies where we continue to find valuations attractive. However, we continue to struggle to see long term value in Telcos or Utilities – generally these are heavily indebted companies with poor track records of cash conversion facing structural challenges. Hence, we currently have no holdings in these areas.
The fund was also down over the month. The main detractors were our Oil Service companies, which were very weak, tracking the fall in the oil price, which was down some 31% over the month. Short term volatility in the oil price does not change our investment thesis that these companies are well capitalised, and well positioned to benefit from an uptick in exploration and production capex which is expected to increase from here. Despite the recent fall in the oil price, Brent Crude still remains above $60 per barrel. It would take a significant further fall in the oil price from here before capex plans were de-railed materially, and we remain comfortable with our positions. It was not all doom and gloom however – with notably strong performances from Relx, Roche and Vestas.
In terms of investment activity, we took profits in Vestas, following a strong run in the share price. Vestas remains an interesting business, but we felt that the margin of safety was no longer attractive enough following the share price move. We added three new holdings to the portfolio over the month. We purchased Total, where the shares had fallen due to the weak oil price. On a PE of under 10x, and a dividend yield in excess of 5%, the valuation looks attractive here. We purchased Santander, adding to our financials exposure. Santander trades on a PE of 9x, with a 5% dividend yield and 0.7x price to book. We also purchased a small position in GAM Holding, the asset management company which has endured a torrid time recently, with an acquisition write-down and the suspension of a key fund manager. It is definitely a special/distressed situation, but there could be significant value here.