February Update: The pricing of risk assets

 

Monthly Fund Commentary
25 Mar 2019

 

The E.I. Sturdza Strategic Europe Value Fund returned 5.13% in February, out-performing its index by 0.98%. The largest contributor to alpha was Information Technology due to stock selection. The Fund’s overweight to the Health Care sector also helped. The largest drag on alpha was Consumer Staples, although this was not significant (-0.21%). The best performing sectors for the benchmark were Health Care, Industrials and Financials; while the worst performing sectors were Real Estate, Utilities and Communication Services.

The Fund’s best performing stocks in February were AstraZeneca, SBM Offshore and Worldpay. Beiersdorf was the largest monthly detractor from performance, albeit not significant (-0.12%). The Company’s share price fell upon reporting soft Q4 data and resetting their margin targets for 2019. The rationale for this is that it will enable Beiersdorf to invest in growth, digitalisation and productivity. This is not entirely a surprise as recent growth had been lacklustre and the Investment Adviser believes that a focus on gross margin improvements and M&A will lead to strong, sustainable earnings growth over time; especially because Beiersdorf are sub-scale in the US and China, two skincare markets of strategic importance.

Over the month, the Fund initiated a position in AB InBev, which is the largest brewer globally with strong brands and a geographically diversified footprint. Its growth prospects are well supported with robust top-line momentum, some room for margin expansion and the benefit from debt deleveraging. The Investment Adviser has also become more confident about the group’s debt following the refinancing of bonds due in the coming years and a sharp dividend cut. Following share price weakness last year, the Investment Adviser believes that the current valuation depicts a favourable entry point.

The E.I. Sturdza Strategic Global Quality Fund returned 3.93% in February, out-performing its benchmark by 0.92%. The Information Technology sector was the largest contributor to alpha, driven by stock selection. Stock selection was also positive for the Health Care and Consumer Staples sectors. Materials and the Fund’s relative overweight to the Consumer Staples sector were the only marginal detractors to performance. Infor-mation Technology, Industrials and Financials were the best performing sectors for the benchmark; while Real Estate, Communication Services and Consumer Discretionary were the worst.

The Fund’s best performing stocks over the period were Worldpay and Visa. At the other side of the spectrum, International Flavors & Fragrances was the worst performing stock. The Fund also initiated a position in AB InBev over the month.

The Investment Adviser maintains their cautious view on markets even though there has been a partial rebound year-to-date, the team do not believe the worst is over. They are still concerned about the pricing of risk assets given the overall tightening of global monetary policy and the amount of leverage in the current economic system.

In this environment the Investment Adviser retains its preference for defensive portfolio positioning; however the market has begun to move to this way of thinking, and so the team are finding selective opportunities outside of their traditionally preferred sectors.

The views and statements contained herein are those of Lofoten Asset Management in their capacity as Investment Adviser to the funds as of 14/03/2019 and are based on internal research and modelling.