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MI Chelverton European Select Fund – Monthly Manager Commentary – September 2019

MI Chelverton European Select Fund – Monthly Manager Commentary – September 2019

European markets were stronger in September. Macro news was again in focus, with positive noises being made by both the US and China regarding potential trade talks. Also, the ECB announced a restart to its bond-buying programme, and there were a number of comments regarding the potential for fiscal stimulus to be increased in a number of countries across Europe. Sentiment towards more economically sensitive sectors such as financials and industrials improved as a result of these themes.

The fund enjoyed a positive performance over the month., the online travel business with a dynamic packaging software product, advanced strongly and we continue to see the valuation as attractive, with a prospective free cashflow yield of over 12% and a net cash balance sheet. CPL Resources, a Dublin based recruitment business also performed strongly, following positive results. It too has a high free cashflow yield, approaching double-digit, and is strongly cash generative, with net cash on the balance sheet of around twenty percent of the current market capitalisation. As mentioned above, a number of our financial holdings enjoyed a strong month, including Nordea and ING.

On the negative side, Infotel, a French IT services company was weaker following results. Upon review, we felt that the market had been unduly harsh in its reaction, given the short-term nature of labour shortages attributed to the modest results. The prospects for its aviation document management product are very good, and organic growth generally is strong in the business. In light of this, we have added to our position.

Elsewhere, a number of our more defensive holdings, particularly healthcare, were weaker, driven by the modest sector rotation alluded to above.

The fund made three new purchases over the month. Bank of Ireland is trading at less than half of its book value, and looks very over-sold given its capitalisation and return potential. Salmar is a Norwegian salmon farmer. We took advantage of recent share price weakness to initiate a holding. Salmar offers attractive structural growth prospects at an attractive free cashflow yield, with very low levels of debt. D’Ieteren is a Belgian holding company with a majority stake in businesses which serve the auto glass repair and replacement market. The prospects for this business are very attractive, with opportunities to diversify the offering to sensors and bodywork repair. The Group has no debt, and a double-digit free cashflow yield.

We exited our holding in Akka Technologies over the month. Although we like the prospects for this engineering consultancy, we are cautious about the high level of invoice factoring undertaken by the business, combined with our opinion that it is now more likely to make further acquisitions, rather than paying down debt as had previously been hoped.