January saw a very sharp rally in equity markets globally. In Europe, after a terrible end to 2018, the market rallied strongly in January; this represented the best monthly performance in four years. The Trust managed to essentially keep pace with the market which was very pleasing given the fact that the market was led higher by cyclical companies and value as a factor (natural underweights for our strategy).
We initiated a new position in Vivendi during the month. Our investment thesis is dominated by our perception of the long term opportunity within Vivendi’s Universal Music Group (UMG). The global music industry has experienced a substantial decline in revenues since the turn of the century, led by the decline of physical sales. However, in the last few years, the industry has returned to growth, led by music streaming. It is our view that the consolidated content owners (Sony, UMG, Warner) are in a much better position to extract value from continued increases in streaming penetration than the distributors of content (Spotify, Apple Music etc). Partly for these reasons, we model substantial potential equity upside on a medium term view. Interestingly, Vivendi are looking to sell a portion of UMG to one/several strategic investor(s) during the next twelve months; this could potentially be a catalyst for the wider market to reappraise the implied valuation of the music business.
January (as ever) was an extremely busy period for companies reporting. Pleasingly, many of our holding companies reported strong and reassuring numbers during the quarter. I would highlight Roche especially. We have made very good money from our position in Roche, which we established mid-way through 2018, but we see the potential for more upside from these levels; the company still trades on a very reasonable 14 x earnings and confidence around an acceleration in earnings growth is slowly seeping into the share price.
We have had a decent start to the year in January and will continue to try to identify the best opportunities for investment in a disciplined and systematic way.