Macro backdrop

Markets started strongly in July, with the latest reporting season producing a good level of earnings that beat projections, albeit versus lowered expectations. However, this did not last long due to the escalating US/China conflict, incremental signs of a US slowdown and data that suggested a second wave of Covid-19 infections in Europe.

Fund performance and activity

By the end of July, the index closed down -0.7% and the fund outperformed returning -0.2%. The positions that performed strongly during July included Kion, Alstom and Vestas. Kion performed well mainly due to its strong exposure to activities that benefit from macroeconomic drivers such as e-commerce and digitisation (in particular via Dematic), a relatively high proportion of more resilient service business, and rebounding China exposure. Alstom reported strong first-quarter orders and sales levels that beat expectations. The orders performance positively surprised the market. Even at the height of the Covid-19 crisis, base orders were close to normal levels, which showed the resilience of the business. Vestas rallied as its order intake has proved more resilient than in past crises, helped by "abundant" green money and its global presence. We  see  two  strong  catalysts  from  which  Vestas  should  largely  benefit: i) the PTC extension already approved by the US, and ii) the EU recovery fund which represents a strong boost for wind markets. Vestas' leading position in both  countries  combined  with  its  c.100GW  of  service  contracts  are  key  assets  giving  credit  to  the  company's  investment  case.

The biggest distractors during the month included Worldline, UniCredit and Hermes. Worldline Q2 numbers and Ingenico deal progression were in line with estimates. From calls with the management, it is clear that Worldline’s consolidation strategy has far to run over the coming years, with many potential catalysts ahead. There is plenty of room for further expansion within Europe, with Worldline arguably best placed to pay for synergies, as well as the possibility for targeted deals further afield. The weakness is mostly technical, as the company issue convertible bonds which are typically hedged by the convertible bond traders by shorting the stock. We think this is a temporary weakness. Unicredit suffered together with the bank sector in July. Hermes missed for the first time in many years. The conference call was reassuring, and we continue to appreciate management’s will to continue developing the company in the long run. However, even though Hermes is more exposed to local clients than peers, the gloomy outlook in terms of tourist flows has lowered the estimates for 2020 and 2021.

During the month, we initiated a position in Brockhaus Capital Management. This is a holding company that invests in technology-driven German small and medium enterprises with strong market share in their niches, high growth, high margins, high return on invested capital and free cash flow conversion. The management's track record in sourcing these deals has been proved through its private equity funds while its members are personally invested by owning about 50% of the company. We took the view that the main driver would be the optionality provided by a €100m capital raising, through which the company intended to double earnings before interest, taxes, depreciation and amortisation in 6-12 months using a late-stage pipeline of deals. Given the strong underlying business resilience and mergers and acquisitions optionality, we bought the shares with the expectation that we would remain holders over the long term.



Depreciation: a reduction in the value of an asset over time

Amortisation: the action or process of gradually writing off the initial cost of an asset