An unprecedented wave of political and economic uncertainty in Europe over the past few years has created significant opportunities for investment teams to uncover real value in Europe’s small and mid-cap equity markets. Bertrand Faure, Portfolio Manager of the EI Sturdza Strategic European Smaller Companies Fund (the “Fund”) has successfully navigated these markets, identifying undervalued companies with high upside potential.
Bertrand Faure believes that European markets currently have better valuation fundamentals than the US markets (Bloomberg shows a PE 18 of 14.2x for EuroStoxx 600 vs 16.6x for S&P 500, dividend yield of 3.5% vs 2.0%). As a result, he anticipates that European markets should offer better opportunities due to the anticipated rise in interest rates, regardless as to whether there are three or four rate hikes in the US this year.
Similar to other comparable market corrections experienced in the recent past, such as the correction after the Brexit vote in 2016, new opportunities will inevitably arise within the team’s investment universe. Consistent with the team’s investment philosophy, the focus remains on the identification of companies that create sustainable value for their shareholders. Bertrand believes that over the long run Free Cash Flow generation is by far the best protection against negative market movements, and that companies that can generate between 8% and 10% free cash flow will remain better investment propositions than a 3% treasury bill, although the market sometimes needs time to recognise this.
The recent market volatility has created investment opportunities in high quality companies within the Fund’s universe at compelling levels, providing significant upside potential.
The team’s investment philosophy has remained consistent since the Fund’s inception in May 2015, utilising a repeatable fundamental bottom-up stock picking process to generate proprietary ideas.
Typically the Fund invests in businesses with predictable cash earnings and high or rapidly-improving returns on invested capital, barriers to competition, positive free cash flow and clean or rapidly improving balance sheets. In many cases, these businesses are family-controlled firms and can deploy capital much more rapidly than their peers.
The investment team conduct their own research in-house and construct more than 50 new financial models each year, which allows them to screen for new investment ideas. This process allows the team to quickly deploy capital in great businesses at compelling entry points when volatility impacts the market.
The research process is rigorous and enables the team to use their deep industry knowledge, combined with active company monitoring to refresh their models and identify opportunities that satisfy their risk/reward criteria. Once a suitable business is identified, the investment team will continue to monitor and model the balance sheets of these rapidly improving companies, providing an indicator of whether the current share price offers the desired risk/return profile prior to a position being established. The team will sometimes monitor a target company for many years prior to a suitable entry point being identified.
The result is a benchmark agnostic, concentrated portfolio of approximately 30 stocks, from an initial universe of more than 2,000 Western European companies with a market cap of up to €5bn. Maintaining a concentrated portfolio allows each position to contribute meaningfully to the Fund’s total return. The team invests with a long-term mindset, as such core positions are commonly held for two or more years.
Given the Fund’s investment universe, capacity is limited, and the Fund announced in 2017 that it would soft close when assets reach €230m, with a view to hard closing to new investments at €250m. Asset growth has increased over the past 12-18 months and as such it is anticipated that the soft close limit will be reached in the near term. We believe the decision to limit capacity is in the best interest of our valued investors and will ensure that the Fund can continue to deliver its investment objective.
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Contact Adam Turberville
Head of Client Relations
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The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 21/05/18 and are based on internal research and modelling.
The value of the funds and the income which may be generated from it can go down as well as up and therefore investors must be able to bear the risks of a substantial impairment or loss of their entire investments.
E.I. Sturdza Funds Plc and its sub-funds, are Irish funds authorized by Irish Central Bank. This communication is issued in Guernsey by E.I. Sturdza Strategic Management Limited which is regulated by the Guernsey Financial Services Commission. Any investments or investment services mentioned on this communication are not intended for retail customers. Consequently, this communication is only made available to professional investors and eligible counterparties and should not be relied upon by any person that does not possess professional experience in relation to investments. If you are in any doubt as to whether you possess suitable experience in relation to investments please consult your financial adviser. Under no circumstances should this document be forwarded to anyone in the United Kingdom who is not a professional client or eligible counterparty as defined by the FCA. The information contained herein is estimated, unaudited, may be subject to change and reflects the performance of the relevant funds during the period indicated. Any opinions or estimates expressed herein are at the date of preparation and are subject to change without notice. No such opinions or estimates constitute legal, investment, tax or other advice. This document is intended for information purposes only and is not intended as an offer or recommendation to buy, sell, or otherwise apply for shares in the funds.