February saw a continuation of the sharp year-to-date rally in global equity markets. European equities climbed in February led by the slightly strange combination of Healthcare alongside a number of more cyclical sectors (Basic Materials, Industrials, Financials and Technology). The Trust had a strong month, with outperformance being driven by stock specific factors, namely strong 2018 results from a number of our key positions.
February was a relatively quiet month for trading activity and so I will spend some time discussing a position that we initiated in January; Aeroports de Paris (ADP). We would categorise this as a ‘Special Opportunities’ investment. ADP operates the three main Paris airports; Charles de Gaulle, Orly and Le Bourget. The business thus mainly derives revenues from the circulation of passengers and cargo, the operation of real estate and retail outlets. We see ADP as a high quality business; a defensive and fairly predictable play on the structural growth in air traffic. However, our primary interest in ADP as an investment is based around the prospective sell-down by the French State who currently own just over 50% of the business. We believe that this sell down will happen (there is some debate over this) and that it will happen at an attractive enough price to enable a strong annualised return from our investment.
As a reminder, ‘Special Opportunities’ tends to be the smallest of the three investment categories that we will consider. We tend to spend more of our time trying to identify ‘Compounders’ and ‘Improvers’; the former is where we see returns as being high and sustainable and the latter is where we have identified the potential for returns to materially improve over the medium term.
As mentioned above, February was characterised by generally strong 2018 results from a number of our key positions. I will highlight a couple of these. First, Vivendi (a position that we initiated in January) reported 10% organic revenue growth from its music business, UMG, in Q4. Their streaming revenues are growing at over 40% which, in our view, bodes very well for the ongoing initiative to sell a strategic stake in this business. Second, it is worth mentioning Nestle. This is a high quality (‘Superior Returns’) business that is displaying accelerating organic growth (3.6% in Q4), strong margin progress in line with medium term objectives and progress on the disposal of non-core businesses; we have maintained a decent-sized position.
We have had a decent start to the year and will continue to try to identify the best opportunities for investment in a disciplined and systematic way.