August update: Strong run of industrials during the month

The Strategic Europe Value Fund* returned 1.2% in August, outperforming its benchmark by 3.5 percentage points. At a sector level, Information Technology, Financials (driven by the Fund’s significant underweight) and Industrials were the best performing sectors in terms of contribution. Both sector allocation and stock selection were strong over the month.

Monthly Fund Commentary
24 Sep 2018

The Strategic Europe Value Fund* returned 1.2% in August, outperforming its benchmark by 3.5 percentage points. At a sector level, Information Technology, Financials (driven by the Fund’s significant underweight) and Industrials were the best performing sectors in terms of contribution. Both sector allocation and stock selection were strong over the month.

The only positive performing sector for the benchmark was Information Technology; whilst the worst performing sectors were Telecommunication Services, Financials and Materials. The Fund’s top performing stocks in August were Wirecard and Worldpay. Both companies are beneficiaries of the structural shift towards e-commerce, a sector which is experiencing strong and accelerating secular growth trends. The only significant detractor over the month was Criteo, with the returning CEO implementing changes which are likely to delay the recovery. This said, the Investment Adviser’s view on the Company remains positive.

During August, the Fund exited positions in Stroeer, Orkla, and Bayer. Stroeer was sold on macro concerns given that it operates in the small & mid-cap European media space. Further, the team are critical of the new strategy of aggressive M&A in the call centre space. Despite the Company’s potential, Orkla was sold as management continue to disappoint. The position in Bayer was exited in August due to concerns surrounding its legal setback over Monsanto’s weedkiller, which could be very expensive for Bayer and take several years to resolve. In addition to this, the Company continues to have downgrades on the operating side. Overall, the team are convinced that they can find better investment opportunities.

The Strategic Global Quality Fund returned 0.9% in August; underperforming its benchmark by 0.4 percentage points. At a sector level, the main detractor from alpha was Consumer Staples, mostly driven by the Fund’s overweight to the sector. Consumer Discretionary also dragged on performance, largely due to Criteo. On the other hand, industrials was the best performing sector for the Fund in terms of alpha. Information Technology and Health Care were the best performing sectors for the benchmark over the period; whilst the worst performing sectors were Energy and Materials.

The Fund’s top performing stocks were also Wirecard and Worldpay in August, with the main detractors being British American Tobacco and Criteo. The Fund sold its position in Electronic Arts during the month, as the Company was subject to its second profit warning.

The investment team are concerned about management; in their view the risk reward profile has changed, triggering the decision to sell. The investment team maintain their cautious view; concerned about risk assets given the overall tightening of global monetary stimulus, the strengthening of the US dollar and the impact of normalising interest rates on Emerging Markets. The economic system is highly leveraged and subject to shocks which are starting to appear. In Europe, macro data continues to deteriorate. The investment team retain their preference for defensive portfolio positioning in this environment.

*EUR I Class.

The views and statements contained herein are those of Lofoten Asset Management in their capacity as Investment Adviser to the funds as of 12/09/18 and are based on internal research and modelling.