PERFORMANCE COMMENT
The LO Funds – Europe High Conviction underperformed the market by 1.24% in April. The Fund was up 0.64%, while the European market (MSCI Europe Index) rose 1.88%. April, as in March, was characterized by large swings in the market. Having initially fallen over 3% in the first half of the month, the index finished in positive territory, highlighting continuing volatility. The Telecoms sector was the main driver of Fund underperformance with our positions in Iliad, Millicom and Ziggo having a combined negative contribution of 0.60%. The impact from not investing in Financials and Energy had a negative impact of 0.28%. Year to date, the Fund is up 5.06% compared to a market return of 4.01%, outperforming by 1.04%. The two sectors that we do not invest in, financials and energy, had a combined negative impact of 0.20% for the year.
PORTFOLIO ACTIVITY
We trimmed our positions in ASMI, Sika and Michelin following good performance. We also reduced our exposure to Puma. We recycled the cash to increase our position in Telecity, where we continue to see great value and growth potential, and added to Wirecard on some recent underperformance. On average, the Fund had a cash balance of just under 2.0% of assets under management in April.
QUARTERLY OUTLOOK
We continue to run the Fund in a cautious manner given our long-held concern about Europe’s sovereign debt issues and their impact on the overall economy. We retain an eye on actions taken by governments and central banks, although our view is that there will be no quick fix to the sovereign debt issues in the euro zone.
STOCK PERFORMANCE: TOP CONTRIBUTORS AND TOP DETRACTORS
CONTRIBUTORS
The three stocks that contributed the most to Fund performance in April were our positions in ASMI, LVMH and Edenred.
ASMI: the technology company’s first quarter results beat consensus expectations across the board with a particularly strong order intake (+63% year on year). The combination of these results and some broker upgrades led to good performance in April. We continue to believe that adjusted for the company’s stake in ASM Pacific,
ASMI’s underlying business remains undervalued by the market.
LVMH: with first quarter organic sales growth of +6% alleviating fears of a slowdown in the core Louis Vuitton brand (fashion
and leather registered organic growth of +9%), the shares have performed well with most categories demonstrating strong growth characteristics.
Edenred: the focus has been on the currency headwinds over the past six months. Whilst these have showed no sign of abating, the quarterly numbers highlighted the strong organic growth both in terms of issue volumes (+13.7%, ahead of peers suggesting market share gains) and revenue of +7.1%.
DETRACTORS
The three positions that cost the Fund the most in April were Iliad, Ingenico and Zodiac Aerospace.
Iliad: with Vivendi accepting Altice’s offer for SFR, investors’ appetite for speculating on further consolidation in the French telecoms market waned. Iliad’s weak stock performance seems unwarranted as the potential for a deal to be struck with
Bouygues Telcom remains. Additionally, the underlying business continues to perform well.
Ingenico: a broker downgrade and renewed fears related to threats from new technologies in the payments market drove the company’s stock price lower in April. Incidentally, the company published its results in early May that showed organic growth of approximately 20%, nearly twice the growth rate sell-side brokers were expecting.
Zodiac Aerospace: despite reporting solid first half revenue growth (+8% organic), which was in line with market expectations, the shares underperformed. There may have been a “sell-off” element following the strong performance of the stock over the past six months. However, we see no real reason for this move and see further weakness as an opportunity with our investment case remaining intact.
STOCK OF THE MONTH: TELECITY
(MARKET CAPITALIZATION USD 2.4 BILLION, EUR 1.7 BILLION)
Telecity operates 38 carrier-neutral data centers in 11 countries in Europe (44% in the UK and 56% in the rest of Europe). The primary services provided are colocation facilities and related services such as connectivity and managed services.
The company rents out space and power to various companies who outsource their IT infrastructure.
Telecity is the joint leader of activity of Europe’s internet hubs with a 26% market share. The market is highly consolidated with the top four players comprising over 80% share.
WHY WE LIKE THE STOCK...
1. Attractive demand drivers, such as growth of consumer internet traffic and need for cloud-based software delivery, has generated over 18% organic growth over the past seven years. Even though the growth has abated, it should remain in the region of 10% for the foreseeable future.
2. This is a highly consolidated market and Telecity is market leader in 10 out of the 12 cities where it operates.
3. Despite large capex plans over the past few years which has led to concerns of overcapacity, revenues per square meter or sold kW have continued to rise as demand proliferates.
4. Consistent margin improvements has produced consistent EPS growth over a number of years, highlighting good operational leverage and resilience of the business model.
5. At 14x EV/EBIT 2014, with double digit growth rates and ROE above 20%, we believe that this valuation is highly attractive.
