European markets were moderately higher over the month. With company results season largely over, focus again returned to macroeconomic issues. The mood was slightly more optimistic regarding a potential US-China trade deal, lifting markets generally. There were also some tentative signs that data at the macro level was becoming less bearish, although these signs were tentative rather than conclusive. Despite these signs, the rotation from growth/quality into cyclical and value-type companies, seen in recent months, appeared to stall during November.
Fund performance was also positive over the month. Positive results from Bouvet, a Scandinavian IT consultant helped boost the shares. Greig Seafood, one of the fund’s salmon farming holdings was also strongly up on good results. The fund’s oil service holdings – Subsea 7 and TGS-Nopec - also performed strongly over the month, recovering from recent lacklustre performance, particularly at Subsea 7 as mentioned last month.
On the negative side, GAM Holding, the Swiss asset management group was off sharply, following the announcement that one of its investment teams had resigned. We continue to believe that GAM remains significantly undervalued. Saras, a leading European crude oil refiner, was also weak, following short term pressure on margins from increases in Asian competing supplies.
The fund purchased Group SEB during the month. SEB is one of the worlds leading cooking utensil and food preparation companies. With a strong position in China and emerging markets generally, growth should be high single digit, with an attractive free cashflow yield of around 6%. Both of these measures are significantly above the overall market levels of both sales growth (3.3%) and free cashflow yield (4.3%). This places SEB firmly in our “sweet spot”, combining good growth prospects with cheaply valued cashflows.
We are firmly of the belief that our investments do not need excessive levels of financial leverage in order to deliver good returns. Capgemini, the French IT services company appears to offer good value at current levels. However, it is undertaking a significant acquisition, which will likely push its net debt to EBITDA ratio to elevated levels. This, combined with concerns about the operating performance of the target, led us to exit the holding. The current net debt to EBITDA ratio of the portfolio is less than one third that of the European market (0.5x versus 1.6x).