After a strong performance from equity markets in June, July saw a more subdued performance. Equity markets finished in marginally positive territory, as did the Trust.
We placed very few trades during July, as was the case in June. In totality, we sold two existing holdings (ASML and Osram). We initiated a position in AMS and having made over 20% we subsequently sold the position (a rare short term investment from us that I will explain below.)
ASML, the Dutch lithography company is a business that we have liked and owned for a long time. However, we are increasingly concerned that the company may have set itself too ambitious a delivery schedule for its key next generation product, the Extreme Ultra Violet (EUV) lithography tool. We feel that any further delays in its delivery schedule could prove to be a negative catalyst for the shares. Linked to this first point, we see earnings expectations for this year as also being ambitious and are concerned that with a 32 x P/E valuation, any earnings downgrades will disproportionately impact the share price. We will closely monitor the company to try to identify a point at which we can re-enter the position.
We bought a position in Osram, the German LED company, in March. Our original investment thesis was that the company should see a strong earnings recovery over the medium term from current trough levels and that, in addition to this, there was a good chance that the ongoing, publically-disclosed negotiations with Bain and Carlyle could result in an offer being made for the company. The timing of our purchase was not good and the company issued a profit warning at the end of March. At this point we reduced our exposure, but as we reached June, we found an opportunity to buy some more shares at very depressed levels. Our timing on this second purchase proved to be better as Osram went on to receive a formal offer from its private equity suitors in July. We used the ensuing share price strength to exit our position.
AMS was never intended as a short term trade for us. We initiated a position in this Austrian semiconductor company on the basis that its optical sensors business was attractively positioned and extremely undervalued given the medium term opportunity in both consumer electronic devices (facial recognition) and in auto markets (for use in autonomous cars). We felt confident that the market had become too negative on the company. Soon after we initiated our position two things happened. First, the company reported numbers that exceeded consensus expectations and the shares rallied ~20% as a result. Second, AMS started to express a desire to acquire Osram. We were concerned that the desire to purchase Osram represented a significant change in strategic direction and would lever the balance sheet to uncomfortable levels. For this reason and combined with the valuation being ~20% higher than when we had bought the position, we sold it towards the end of the month.
Notable strong performers during the month were Philips, AMS and Grifols. SAP, Novo Nordisk and Knorr Bremse underperformed.
Philips, the Dutch healthcare equipment company, announced strong quarterly numbers which enhanced our conviction in the company’s ability to grow structurally and to improve its Return on Invested Capital (ROIC) over the medium term. I have discussed AMS above. Grifols, the Spanish blood-plasma company, announced strong results which highlighted better-than-expected margin progress and lower-than-expected net debt; the two things that the market is currently most concerned about. We see a very attractive medium term investment case in Grifols.
SAP, the German software business, produced a soft set of quarterly numbers which resulted in the share price falling. Crucially, there was nothing in the detail of their numbers which reduced our long term conviction in the investment case. Novo Nordisk, the Danish pharma company, drifted lower on limited news-flow whilst Knorr-Bremse, the German brakes company, saw its share price fall as investors sold cyclical businesses.
As described above, July was a relatively quiet month for trading on the Trust. This was largely because we are happy with our current positioning. We continue to allocate an appropriate portion of our time to the identification and thorough research of new ideas.
Cyclical businesses: 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.