September was a poor month for European equities generally. Markets remain concerned that inflationary pressures do not appear to be abating, combined with a looming recession. Interest rate expectations are now set for further significant rises over the coming months. In this “risk off” environment, smaller companies were notably weak, underperforming broader indices by several percentage points.
The fund was down over the month, with the poor performance being exacerbated by our significant exposure to smaller companies.
Positive contributions over the month came from Roche (positive trial data on a comparable Alzheimer’s drug), Arcadis (environmental consultancy), Siemens (industrial), ING (seen as beneficiary of interest rate hikes) and Unilever (consumer staple, seen as defensive in turbulent times).
The majority of underperformers were, not surprisingly, smaller companies across a range of sectors. In many cases, the selling has appeared to be quite indiscriminate, giving us opportunities to add to a number of our existing holdings at what we perceive to be very appealing valuations. Aside from smaller companies underperforming, there were also negative contributions from Var Energi (oil and gas producer) and TGS (oil services) as a result of the weakening oil price.
In bear markets, it is important to remain constructive, and stick firmly to one’s investment process. As we exit the third quarter of 2022, the fund’s valuation metrics are very attractive. The free cashflow yield of the fund is now 8.2%, higher than the comparable level at the depths of the covid crisis in April 2020 and compares to the broader market at 5.8%. And this for expected growth over the next 3 years of around 12% on average. Further, with the portfolio’s net debt to EBITDA of just 0.2x, versus the broader market at 1.3x, we are confident that our investments