June update

BY WILLEM VINKE

Monthly Fund Commentary
24 Jul 2018

BY WILLEM VINKE

​In June, the Europe Value Fund returned +0.59%*, outperforming its benchmark by 1.28 percentage points. In terms of alpha, the main contributor was Consumer Discretionary, largely due to Criteo. The Fund’s overweight to Consumer Staples also helped. The best performing sectors for the benchmark were Utilities and Consumer Staples; whilst Consumer Discretionary, Materials and Industrials were the worst performing sectors in June.

The Fund’s top performing stock was Criteo, which is a French leader in the fast growing AdTech part of the online advertising market, which uses algorithms to predict users’ intent, thereby enabling them to assist in the purchasing and selling of advertising inventory. Importantly, Criteo allows clients to identify the RoI on their advertising expenditure, something increasingly sought after as companies reallocate their marketing budgets. Given its first mover advantage, the algorithm will only improve as the client data set grows. The share price suffered during 2017, largely on the news that the latest version of Apple’s operating system will include a new default feature, intelligent tracking prevention (ITP), which prevents certain websites from tracking users browsing activity. According to the Investment Adviser, the Company’s core business however remains best-in-class and valuable to clients, reflected in the c. 20% underlying growth rate. Shares have performed very well during the first half of 2018, with concerns surrounding GDPR and the impact of these regulatory changes on the business model not having materialised. According to the Investment Adviser, the Company has significant cash on the balance sheet, with the shares being attractively valued. There were no significant detractors to performance over the month.

During June, the Fund exited its positions in Heineken, NN Group, Pandora and Akzo Nobel and at the same time initiated a positon in Takeda. Heineken, although a good quality company, has large exposure to Emerging Markets and was close to fair value leading the Investment Adviser to exit the positon. NN Group was also close to fair value, triggering the team to close the position as well. The remainder of the Fund’s position in Pandora was sold following poor Q1 results and much slower growth in China than anticipated. Further the investment team have lost confidence in management. Akzo Nobel was exited due to a deterioration in the core business, with the Investment Adviser having the potential to find better investments.

During the second quarter, the Japanese pharmaceutical company Takeda Pharmaceutical announced a possible acquisition of Shire PLC. The combined entity would become a top 10 global pharmaceutical company in terms of sales, and a more diversified business, both therapeutically as well as geographically. Takeda’s thin late stage pipeline issue could be addressed, with Shire’s global platform constituting a significant operational gain. In addition, the overlap between the businesses’ management will result in significant synergies. The final hurdle to the deal is a shareholder vote at the EGM in December, with the Investment Adviser expecting the deal to go through. According to the team, there is good upside to the shares once the market has a clearer view of Takeda as a whole and begins to see the debt being repaid. The team decided to switch parts of the Fund’s holding in Shire to Takeda as – although it could be argued that Shire is a cheaper way to acquire Takeda shares – the Investment Adviser aims to remove the risk associated with the deal falling through, in which case Takeda shares are expected to rebound strongly.

The Strategic Global Quality Fund returned +2.12% in June, outperforming its benchmark by 2.17 percentage points The Fund’s overweight to the Consumer Staples sector was the largest contributor to alpha. Stock selection was strong over the month, with Criteo contributing the most to alpha. The best performing sectors for the benchmark were Consumer Staples and Utilities; whilst the worst performing ones were Industrials and Financials.

The Fund’s top performing stock was also Criteo in June. There were no significant detractors over the month, with the Fund exiting its position in Heineken and initiating a position in Takeda for the reasons discussed above.

The investment team maintain their bearish view; concerned about risk assets given the overall tightening of global monetary stimulus; the strengthening of the US dollar and the impact of a normalisation of interest rates on Emerging Markets. According to the Investment Adviser, the economic system is highly leveraged and subject to shocks, which are starting to appear. Furthermore, investors are understandably worried about a less robust outlook for global growth and the risk of a further escalation of trade war rhetoric.

In Europe, political and macro risks prevail. The Italian election caused some short-term volatility, with the potential for more to come. Further, trade wars are having a strongly negative effect on the German economy. In the United Kingdom, Brexit progress has been slow, with companies becoming more anxious as the deadline approaches. Recent cabinet changes may give Prime Minister May a more unified team, but it is still unclear as to how things will look post the 29th March deadline.

The investment team continue to have a strong preference for a defensive portfolio positioning in this current 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 20/07/18 and are based on internal research and modelling.