Performance Review 2007
ISIN: IE0032904116
Robrecht Wouters: "First half outperformance was driven by a variety of names. Wavecom, a manufacturer of wireless communication modules, rose strongly on stronger-than-expected first quarter revenue growth and a re-evaluation by investors of the company’s underlying growth prospects. Cegedim, a medical information database operator, saw its shares surge on the view that company’s acquisition of its largest competitor would lead to material synergies. Another notable contributor was Dutch newspaper publisher Wegener, which announced an improvement in its operations and agreed to be bought by UK-based media investment company Mecom.
Concerns about the deteriorating macro outlook prompted us to begin positioning the portfolio relatively more defensively. This defensive thinking saw us trimming a number of our cyclical winners and adding to some large cap defensive names in the first half of 2007. In the second half of the year, we continued to eliminate cyclical companies as much as possible and focused on “as-predictable-as-possible” high quality, highly cash-generative companies.
Notwithstanding this shift, the fund’s substantial exposure to small- and mid-cap stocks was detrimental to relative returns in the second half of the year, when market sentiment deteriorated and the shift to large caps became more pronounced. Typically, stocks with US dollar exposure suffered, good results from medium-sized companies were often ignored and any poor results were sometimes excessively punished. Three mid-cap holdings – Omega Pharma (Belgian OTC pharmaceutical company), Seabird Exploration (seismic exploration) and Francotyp-Postalia (mailroom machines and services) – played a big part in the fund’s underperformance in the second half."
Performance Review 2008
Robrecht Wouters: "It was a year of two halves for the fund. We underperformed the FTSE Eurofirst 300 Index in the first half of 2008, and outperformed the index in the second half.
At the beginning of the year, the fund had already been positioned for an economic slowdown. Our emphasis was on defensive, high free cash flow generative companies whose share prices had come under considerable pressure, but whose fundamental value seemed unlikely to be materially affected by different macro-economic scenarios. From a sector allocation point of view, the fund’s structural bias towards stable, high ROCE and “capital light” industries meant it continued to have relatively little exposure to utilities and resources stocks. Meanwhile, in terms of market capitalisation, exposure to mid- and small caps was above the index weighting.
Over the first half of the year, the fund was hampered by macro/momentum driven market behaviour. Specific headwinds were investors allocating money away from small caps, investors overacting to short-term, mildly negative company news and ongoing gains in resources stocks. In addition, we had an unusually high number of stock-specific disappointments in our small-cap book. Names worth mentioning in this regard are Omega Pharma (Belgian health care; which we sold following a change in management), Wavecom (French wireless technology), Seabird Exploration (Norwegian oil services) and Francotyp-Postalia (German mail franking technology).
Most significant and unusual was the loss caused by Vanco, a UK telecommunications operator. We felt that Vanco had a strong recurring business model, with long-term contracts securing strong future free cash flow and growth which ‘easily’ supported its reported debt levels. The company had secured further credit facilities from the banks, but in May, the banks withdrew their support and took over ownership. It transpired that the firm’s annual accounts failed to represent the true state of its balance sheet and debts.
In the second half of the year, increased worries of a widespread economic slowdown began finally to play into our favour as investors began to pay more attention to earnings predictability and risk. The fund’s structural sector positioning – most notably, underweight positions in the financials, industrials, basic materials and oil & gas sectors – was helpful, as was our decision (at the beginning of the second half) to reduce exposure to micro caps (market cap of below €2 billion) and increase exposure to defensive large caps (market cap above €15 billion). Also positive, the US dollar headwind, which had been an issue for many of our companies, started to peter out.
Over the second half, we bought in to some cyclical names that had seen severe share price declines. Luxury product group Richemont (Switzerland), for example, had demerged its BAT stake and looked very attractively valued. Other additions comprised Henkel (chemical products), Umicore (specialist materials), Wolfson Microelectronics, (integrated circuits) and DSM (chemical products)."
Performance Review 2009
Robrecht Wouters: "The fund’s considerable outperformance in 2009 was founded upon very strong stock selection across a wide spread of sectors including particular success within telecommunications.
As we entered 2009, the core of the portfolio comprised high quality, defensive and cash-generative businesses that were trading on exceptionally low valuations, stocks such as telecoms companies Virgin Media, Freenet, a German mobile telecommunications company, and the Danish brewer Carlsberg. In each instance, these stocks recovered significantly from their extremely depressed valuations as the market recognised these positive qualities.
In technology, Temenos, a world-leading provider of banking software, added considerable value. We initiated a position in the stock in January following an unsurprising profit warning that led the company’s share price to fall by more than 40%. On drastically lowered and more realistic earnings expectations, Temenos traded on a highly attractive valuation of less than eight times depressed 2009 earnings when we built our position.
In basic materials, owning UK-listed mining company Rio Tinto was helpful. We bought into the stock in January 2009 on weakness. Its share price had collapsed to a level that fully discounted a rights issue and assumed that that metal prices would remain indefinitely below their marginal cost of production. The stock fared well as commodity prices rebounded strongly in the context of an improving global macroeconomic picture and high levels of Chinese demand. Not owning fellow UK-listed miner Xstrata did detract from relative returns, however.
The only major headwind to performance at the sector level encountered during 2009 was the fund’s underweight exposure to the recovery in financials, where not owning banking stocks Banco Santander, HSBC and BNP Paribas hurt relative performance."
Performance Review 2010
Robrecht Wouters: "Consistent with our bottom-up investment process, the fund’s significant outperformance over 2010 was primarily generated by stock selection, although the portfolio’s significant overweight exposure to the consumer goods sector and its very limited weighting within financials both added considerable value. Our stock picking in technology, telecommunications and consumer services especially powered the fund’s outperformance.
German telecommunications provider QSC benefited from an extremely low valuation, strong results and a positive outlook, proving to be the best performer for the fund over the 12-month period. ASM International, a Dutch supplier of semi-conductor equipment, also added notable value. In telecommunications, Virgin Media, which had performed well for the portfolio in 2009, again made a significant positive contribution. It recorded strong results and started a share buyback programme that is likely to be of a permanent nature, significantly enhancing shareholder value over the longer term. German cable operator Kabel Deutschland also added value, as its revaluation continued and the company reported good results. Elsewhere, in consumer goods, CSM, a Dutch bakery ingredients supplier, traded robustly. On the debit side, the fund’s call options weighed upon performance, while Abengoa, the Spanish engineering/concessions company, also dragged upon returns, suffering from macroeconomic concerns surrounding the Spanish economy."
Performance Review 2011
Robrecht Wouters: "The fund’s outperformance over 2011 owed much to our structural underweight in the financials sector, enabling us to avoid the de-rating of the sector triggered by concerns over the exposure of many financial names to the eurozone sovereign debt crisis. Our overweight exposure to the consumer goods sector also aided relative performance, although our stock picking here was affected by Dutch bakery ingredients and lactic acid supplier CSM. Importantly, the intrinsic value of CSM´s lactic acid operations is intact, as a result of which, despite our reduced estimate for the intrinsic value of the bakery business, CSM remains very undervalued. With the company announcing new cost saving programmes and, more importantly, a strategic review of its activities, we remain a shareholder. More positively, our stock picking was strong in the industrials, basic materials and consumer services sectors, with Paddy Power and Pearson notable winners in the latter."
Performance 2012 - Year-to-Date
Performance since 2007
Robrecht Wouters: "Our focus on companies that benefit from sustainable and highly predictable cash flow characteristics, that are low in capital intensity (high and sustainable return on capital employed), and that are simultaneously significantly undervalued (low price-to-free cash flow multiple) accounts for the fund’s long-term track record of outperformance."
Investment Process and Strategy – How does the Fund Manager invest?
The JOHCM European Select Values Fund combines a contrarian, valuation-based approach and a focus on high return on capital. Fund manager Robrecht Wouters has a highly selective bottom-up, valuation orientated investment style, which focuses on undervalued companies with high return on capital employed. The approach is an unconstrained, high alpha approach and expects to generate significant outperformance.
Robrecht believes that investing in companies trading at a discount (at least greater than 25%) to their ‘intrinsic value’ will yield above average investment returns. The European Select Values strategy is managed with a bottom-up approach which combines traditional ‘value’ investing (focusing on attractive valuations on a price to free cash flow basis) and quality value characteristics such as high ROCE.
Sector and country positions are a residual of our philosophy and bottom up stock selection. Historic attribution shows that the large majority of value added has derived from stock selection. Robrecht is aware of macro economic factors and risks within his portfolio but his individual stock focus is key.
Investment Outlook
Going into 2012, the portfolio remains rather defensively positioned, even if during the second half of 2011 we have used the weak market conditions to selectively buy high-ROCE cyclicals where we find value, such as in December with Stroer Out-of-Home Media.
Companies that benefit from sustainable and highly predictable cash flow characteristics, are low in capital intensity, and are simultaneously significantly undervalued (low price-to-free cash flow multiple) are the cornerstone of our investment strategy. Economic conditions are difficult to predict, making timing difficult, but with cash flow strong, capital-light companies trading on undemanding valuations, we have time on our side! This ´value-quality’ combination´ should, over time, lead to positive absolute and relative performance.
