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MI Chelverton European Select Fund – Monthly Manager Commentary – November 2020

European equity markets performed very strongly in November. Markets generally were buoyed by positive news regarding several Covid vaccine trial results. With a number of vaccines likely to be available within weeks, markets became more optimistic about economic recovery from here. Stylistically, value also significantly outperformed growth, for what feels like the first time in a long time, as markets began to factor in recovery within more economically sensitive areas of the market, rotating away from the higher rated market leaders of recent years.

The fund enjoyed a very strong performance over the month. Our valuation discipline ensured that we were able to keep pace with the general rotation into more cheaply valued companies. This, despite not being invested in deeper value type companies, where our process has identified structural challenges. Avoiding these value traps going forward will be crucial, as many of these types of businesses will not sustain any recent performance gains in our opinion.

Of particular note in terms of performance, CPL Resources, a recruitment consultancy, received a bid at a significant premium and was up strongly. D’Ieteren, a Belgium based auto glass repair and car dealership business also performed very well over the month, following reassuring results. Arcadis, a Dutch-based environmental consultancy also posted strong gains following very positive results. Elsewhere, our financial holdings and energy-exposed companies were also noteworthy performers, benefitting from the rotation into more economically sensitive areas.

There were no negative detractors to performance over the month.

Over the month we added one new holding. Caverion is a Finnish building technical services company. Demand for its services will be driven primarily by environmental regulations. With very modest debt plus free cashflow yield approaching 8%, it is an attractively valued proposition.

We exited Adesso, a German IT services business following a very strong share price performance, which left insufficient valuation support.

Market commentary in recent weeks has understandably focussed on whether the style-change towards value observed in recent weeks is sustainable. We can definitely see why this might well be the case. However, for us, it is very much business as usual, trying to find a good blend of value and growth. Our process throws up cheap companies in the form of undervalued cashflows with healthy business models.