Outlook for 2018 remains positive

BY BERTRAND FAURE

Monthly Fund Commentary
25 Jan 2018

BY BERTRAND FAURE

2017 was a good year for the Fund, both in terms of absolute and relative performance. The Fund was up +3.02% in December and +22.80% for the year on an absolute basis, outperforming its benchmark by +12.22% during 2017. Since inception, the Fund has returned +38.44% (+13.02% annualised) to its investors compared to +6.76% (+2.49% annualised) for the Fund’s benchmark index, translating into a 31.68% outperformance over 32 months (+10.53% on an annualised basis).

During the year, asset growth was also very strong, increasing from EUR 65 million as at 31st December 2016 to EUR 193 million as at 31st December 2017. As a result, it was announced during September 2017 that the Fund would soft close at EUR 230 million and hard close at EUR 250 million to ensure that the limited capacity and depth of liquidity in the small and mid-cap universe does not impact the Fund’s performance.

During December, uncertainties around the US fiscal reform, that created some volatility in European financial markets in November, vanished, even if benefits remain unclear and unquantified.

The outlook for 2018 remains favourable as US tax cuts, structural reforms in the euro area and the low interest rate environment could provide a solid base for growth. The scope for further multiple expansions appears more limited in 2018, but could be counter balanced by stronger EPS growth and M&A activity. The return of oil prices above $60/barrel should help to reduce deflationary risk, providing central banks with the opportunity to continue their withdrawal at a pace that may accelerate in 2018 and 2019. The Investment Adviser believes that markets remain vulnerable to macro disappointments and changes in the policies of central banks, as many valuation metrics appear stretched and investors still show signs of complacency.

In December, Tom Tailor was the largest monthly contributor to the Fund’s performance, followed by Takeaway.com and Metall Zug. Tom Tailor’s stock price was up 17.1% during the month (adding 0.50% to the Fund’s performance). The Company’s Management were present at several well-attended conferences during the month and provided an optimistic outlook for further cost cutting and deleveraging opportunities for the years to come. Like in November, Takeway.com performed well with little specific news to report. Finally, Metall Zug rebounded following the announcement of a sizeable acquisition in Switzerland, Haag Streit, a family-owned medtech company and a global market leader in the premium segments of the growing ophthalmology market. The takeover of Haag Streit will enable the deployment of Metal Zug’s cash pile to create the eagerly awaited fourth business unit of the company, which was one of the major reasons underpinning the Investment Adviser’s thesis for this Company.

At the other end of the spectrum, Spie, OVS and Brembo were the three main detractors with their impact on monthly performance however being limited. The three positions together only negatively impacted the Fund’s gross performance by -0.37%. As such, there is little information to be reported apart from a final secondary placement in Spie, as a result the private equity owners that relisted the company mid-2015 no longer hold an ownership stake.

During December the Investment Adviser initiated a new position in Valmet in Finland, a leading global supplier of services and equipment to the pulp, paper and power generation markets and a key competitor to one of the Fund’s other investments, Andritz from Austria.

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 09/01/18 and are based on internal research and modelling.