May update

BY WILLEM VINKE

Monthly Fund Commentary
25 Jun 2018

BY WILLEM VINKE

​In May, the Europe Value Fund* returned +1.37%, outperforming its benchmark by 1.26 percentage points, partially attributable to the Fund’s underweight to Financials. The largest detractor was Consumer Discretionary (largely due to Pandora), whereas Information Technology performed well throughout the month.

Information Technology, Materials and Energy were the best performing sectors for the benchmark over the period, whilst the worst performing were: Telecoms, Financials and Utilities.

In May, the Fund’s top performing stock was Wirecard. The Company continues to deliver; purely playing on the structural shift towards online payments and ecommerce, a sector which is experiencing strong and accelerating secular growth trends. Wirecard has become a real global player, with the shares continuing to compound nicely. According to the Investment Adviser, the investment case still has a long way to go as critical levels in online payments are reached outside of the U.K.

The largest detractor over the month was Pandora; with the main concern being that growth in China is much slower than the Company had hoped for; this being due to a large increase in grey market sales and insufficient marketing activities by the Company. Furthermore, the US market is still causing problems and management execution is very poor. The stock is under review by the team, with the position having been reduced recently.

Over the month, the Fund exited positions in Convatec and Liberty Global and initiated a positon in Novo Nordisk. Convatec has performed well YTD and – given current macro concerns – the investment team wanted to reduce some of their small cap exposure and at the same time find more exciting ideas. Liberty Global’s deal with Vodafone happened as anticipated, although the investment team do not agree with the price paid by the Company. In addition, dynamics in the industry are deteriorating, facing more pricing pressure, with other investment ideas being more appealing. Novo Nordisk is a stock the investment team know well, with the Fund having held this stock in the past. Novo have some exciting pipeline opportunities within diabetes and potentially obesity. In the view of the Investment Adviser this is not fully appreciated by the market. The position supports the current defensive positioning of the Fund.

The Global Quality Fund returned +0.53% over the month, underperforming its benchmark by 0.10 percentage points. The Fund’s overweight to the Consumer Staples sector was the largest detractor in May; with currency also playing a part in this. In addition, the Fund’s underweight to the US$ hurt performance as the dollar strengthened over the period. On the other side of the spectrum, the Fund’s significant underweight to Financials helped relative performance. The best performing sectors in the benchmark were Information Technology, Energy and Materials; whilst the worst performing were: Telecoms, Financials and Utilities.

In May, the Fund’s top performing stock was Wirecard, while the worst performing stock was International Flavours & Fragrances. Throughout the month the Fund exited its position in Estée Lauder on valuation grounds. The Fund held the stock for a long time, during which it has more than doubled. Novo Nordisk was added to the Fund in May.

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. The economic system is highly leveraged and is subject to shocks which are starting to appear. Furthermore, trade concerns remain at the forefront for investors and closer to home; developments in Italy cause significant concern for the European Union. The Investment Adviser continues to watch the situation closely.

Overall, the investment team continue to have a strong preference for a defensive portfolio positioning in this current environment as macro and political risk remain prevalent.

*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 15/06/18 and are based on internal research and modelling.