After a strong start to the year, European equity markets fell in May giving back around a third of their year-to-date gains. Macro-political news flow remained focused on the ongoing trade discussions between the USA and China; the degree of genuine progress remains very hard to ascertain from the outside. The fund outperformed in this environment.
We added two new positions to the fund in May; Cellnex and Bawag. Cellnex, the Spanish owner of telecoms towers, operates in an industry with high barriers to entry, long term contracts and high levels of recurring free cash flows. In addition, the industry is consolidating and we see Cellnex as well positioned to acquire substantial additional tower assets over the medium term. The company trades at a material discount to similar, US-listed peers. During the month, we also participated in a secondary private equity sell down in the Austrian-listed, predominantly-retail focused bank Bawag. There are several aspects to our investment thesis. First, we see the core business as generating a high and sustainable Return on Equity, largely through their best-in-class cost base management; this is not reflected in the current valuation. Second, we see management as disciplined allocators of capital who are likely to find attractive opportunities to deploy capital into their core DACH region. Finally, with substantial excess capital, there is likely to be a prolonged period of share buybacks in the absence of material M&A.
The best performing positions during May included RELX, Deutsche Boerse and Linde, whilst the worst performing positions included Equinor, Brenntag and ADP.
We see RELX as a high quality business exposed to several attractive end markets. Its core businesses tend to have predictable revenue streams driven by subscription payment models, high margins due to consolidated competitive landscapes and high Return on Invested Capital on account of low capital needs and the aforementioned high margin structures. We continue to look through what we see as short term concerns (for example, over academic journal contract negotiations) and focus on the long term attractions. Deutsche Boerse has demonstrated a more resilient revenue performance than it has historically delivered in a tough equity trading environment; to us this highlights the increasingly diversified nature of its revenue streams. The company continue to over deliver on cost efficiency. Linde delivered strong, consensus-beating quarterly numbers in May that highlighted mid-single-digit underlying revenue growth and expanding margins.