Fund Manager December 2021 Commentary – Henderson EuroTrust
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In December, the Trust had a disappointing month and we continued to struggle for performance.
This was very much a market led by value and cyclicality and our best performing positions included Unicredit, CHNi, Stellantis and Munich Re. From these four positions, the only thing worthy of stock-specific comment was the Unicredit Capital Markets Day. During this event, the new CEO, Andrea Orcel, laid out his medium-term intention to return the bank to a business capable of delivering a double digit return on tangible equity. If he is successful, we believe that this could potentially result in a substantial rerating of the equity from their current 0.4 to 0.5 x tangible book value trading range.
Our worst performing positions included Delivery Hero, Cellnex, Zur Rose and HelloFresh. These are all very much ‘growth companies’ and this was not the environment for these kinds of stocks to perform well. We retain our faith in Delivery Hero, which we see as capable of reaching profitability within 24 months, and Cellnex, which offers a defensive and growing stream of future cash flows. We have sold our position in HelloFresh which we see as more challenged over the next few years whilst maintaining a small position in Zur Rose.
We have repositioned the portfolio somewhat in recent months. In summary, we have been working to increase our cyclical exposure heading into 2022 (via companies such as SKF, Safran, Arkema and Total), we have reduced position sizing in our earlier-stage tech companies (Delivery Hero, Sinch and others) and we have balanced our sector exposure. The intention is to better position the portfolio to benefit from the post-Covid recovery whilst aiming for a more neutral cyclical/defensive tilt (we have been meaningfully overweight defensives) and a slightly more diversified portfolio (more stock specific risk, less factor/sector/thematic risk). As part of this rebalancing, and alongside other trades, we bought new positions in Total, Arkema and SAP in December whilst selling Hellofresh and RWE.
We will continue to retain balance in our exposures by considering two types of business for investment; those where we see high and sustainable returns that are undervalued by the market and those companies where we can see a material improvement in medium term business prospects.
Value of an asset is its value on a company’s balance sheet; this may differ from its market value.
Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.
A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. There is a constant demand for their products, so defensive stocks tend to be more stable during the various phases of the business cycle.
Shares of a company which generally show above-average earnings and that are expected to grow at a rate significantly above the average growth for the market.
Return on tangible equity or ROTE is the net profit (after interest and tax) as a percentage of the (average) tangible equity or shareholders’ funds. Tangible equity is equity or net assets less intangible assets such as goodwill.
Shares of a company that appear to trade at a lower price relative to the company’s fundamentals, such as dividends, earnings, or sales.
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