European markets posted small gains over May. Volatility was a feature with concerns over inflation resurfacing over the month.
The fund also showed modest positive performance.
The largest positive contribution came from Recticel, a Belgian insulation and speciality foams business. Recticel received a potential bid approach from a former partner. The bid has not been recommended by Recticel’s Board, since it is viewed as materially undervaluing the prospects for the Group. Bpost, the Belgian postal group also enjoyed strong performance, following positive results.
On the negative side, Indra Sistemas (Spanish IT service and defence contractor) was weaker on the news that its largest shareholder, the Government of Spain, was looking to effect management change. Sovereign involvement is being seen as conflicted and unwelcome, detracting from an otherwise attractive investment turnaround. Elsewhere there was some profit-taking in recent outperformers, including Cliq Digital (media streaming) and Caverion (building services).
During the month we exited TGS Nopec (oil services). Long term concerns over hydrocarbon exploration persist, and better opportunities elsewhere drove the decision. Also, we sold Kering (Luxury goods) following a very strong share price performance, leaving the valuation less attractive.
There were no new purchases over the month.
As regards the inflation debate, we are relatively sanguine. Our view is that a measured and gradual long-term pick-up in inflation, and corresponding modest rises in interest rate expectations will generally be good for our investment style and process, since it will encourage more valuation discipline for investors generally, who will no longer have the luxury of using very low discount rates to justify high equity valuations.