European Smaller Companies Trust (ESCT) has released its annual results for the year ended June 30, 2022. SCT Chairman Christopher Casey says that “NAV full return performance for the year to June 30, 2022 was disappointing at -21.0%, lagging reference negative performance of 17.3%. The total share price return for the year was negative 23.1%. He goes on to say that ESCT’s performance suffered in the first half of the fiscal year as “growth at all costs” stocks saw a huge multiple expansion that unfolded in the second half of the year. exercise, a period during which ESCT benefited from balanced possession wallet.
Managers’ comments on the portfolio
“The portfolio’s strategy is to blend a mix of early-stage growth stocks, with reasonably priced high-yielding structural growth stocks, undervalued cash-generating mature names and stand-alone recovery stocks. We make sure to explicitly state that we are not a “value fund”, but that we are valuation aware.Because of this discipline and our expectation of rising interest rates, we have not added much in terms of early-stage growth stocks during the period.An exception was made for the French-listing NHOA, a fast-growing energy storage company that is using its positive cash flow profile to expand into e-mobility/electric vehicle charging, including a joint venture with Stellantis for charging deployment of electric vehicles in Italy. We opened a position in Swiss-listed solar panel maker Meyer Burger, which we believe holds great promise to be the European champion in providing solar power equipment to drive the European transition towards green energy and reduce dependence on Chinese suppliers.
“We’ve added stories of high-return structural growth at a reasonable price, including Italian initial public offering from Technoprobe, the German company Dermapharm and the French company Ipsos. Technoprobe is the world’s leading manufacturer of probe cards used to test the integrity of semiconductors. The ever-shrinking size and ever-increasing complexity of semiconductors make it a very well-positioned company. Dermapharm is a name we owned in the past but sold due to valuation concerns when stock valuation multiples became very comprehensive after the company provided a key molecule lipid coating to Pfizer/ BioNtech for the Covid vaccine. However, the stock saw a significant downgrade as the market sold “Covid winners” and stocks returned to attractive levels. Ipsos is a global leader in market research and has struggled with perceptions of poor governance in the past, but has a new CEO and appears to be on track to address those issues and unlock the significant valuation discount it is trading on. .
“Among the mature names in the portfolio, we added ams OSRAM, listed in Switzerland, which manufactures sensors and lighting solutions for the consumer, automotive, healthcare and industrial sectors. . It’s a value game against the grain. As expected, momentum in 2022 has been lackluster due to exposure to consumer electronics and automotive. The company is divesting non-core assets and continues to invest in new capabilities for future growth engines such as micro-LEDs. We have invested in Austrian industrial conglomerate Andritz, where we are seeing a good recovery in its hydropower business thanks to turbine sales and a strong increase in after-sales services from its pulp and paper processing business. We reinvested in Norma, a German auto parts and fluid treatment company, where we see good potential for auto recovery and an increased need for rainwater management and irrigation systems in a heating world.
“Flipping names included Belgian listed cinema operator Kinepolis. We also invested in Swiss packaging machinery manufacturer BOBST, which is benefiting from the move away from plastic packaging, and opened a position in Swiss-listed u-blox, which manufactures “Internet of Things” wireless communication modules for the automotive, industrial and consumer markets.Their modules go into a wide variety of connected products, from self-driving vehicles to sports trackers for professional footballers.
Managers’ feedback on performance attribution
“The portfolio is well positioned for the green energy transition and has benefited from exposure to both renewables and liquefied natural gas (LNG), which we have long considered the only sensible way to balance the European electricity grid. without being caught in the jaws. of the Russian bear. Our most significant name during the period was the owner-operator of LNG carriers FLEX LNG. The company’s share price rose significantly after the Russian invasion of Ukraine caused a surge in demand for its ships. We also benefited from our position in the French company Gaztransport et Technigaz, which holds a dominant position in the licensing of membranes for LNG container ships.
Elsewhere, German-listed wind farm developer Energiekontor has performed well, as has Dutch company Fugro, a company that carries out seismic surveys of the seabed for the laying of offshore wind turbine foundations and for research. of oil and gas. The portfolio benefited from its holdings in financials, with German lender Aareal Bank being offered and Irish lender AIB Group performing well.
“Performance critics include German online interior and furniture retailer Westwing which suffered post-Covid when there was some furniture overspending. Danish cross-Channel ferry operator DFDS has suffered from rising fuel costs and concerns over UK-EU relations, the entry of Irish Continental into the cross-Channel ferry market and the consumer willingness to travel. Subsequently, these concerns turned out to be largely unfounded. Meanwhile, Switzerland-listed Montana Aerospace suffered as it faced a squeeze in profitability caused by higher energy costs that the company failed to cover. Other ‘Covid winners’ that have hurt the portfolio as they have fallen out of favor this year include meal kit supplier HelloFresh, Swedish mobile games company Stillfront and German bike and bike accessories retailer Bike24.
Geographical and sectoral breakdown
“The investment process is fundamentally bottom-up stock selection, rather than allocating capital to specific sectors or geographies, although we carefully monitor the overall structure of the portfolio to ensure we avoid risky concentrations. We don’t use the benchmark as a structure guide and just manage the portfolio with a substantial deviation from the benchmark.
“Geographically, we remain Overweight in Germany, and although this is our largest relative overweight in country, it is now much less extreme than a year ago. This is partly explained by the control of the risk related to energy costs, but also by the fact that the position in Aareal was largely sold within the framework of the offer. We are also overweight in the Netherlands, where we added to the portfolio’s position in customer experience management company Majorel (still listed in Amsterdam). This is a growing area and we believe the business is well positioned to benefit from favorable structural growth for many years to come.
“We are overweight in Ireland where we have added nutritional products manufacturer Glanbia to the portfolio. We believe the company has a strong ingredients business that is not recognized in its assessment and should benefit from the whey protein powder price review that is currently underway. The portfolio remains in particular underweight in Switzerland and Sweden where we have struggled to find reasonable price shares in recent years. We are underweight in Norway, where the market has become rather frothy in 2021.
“At a sector level, we are overweight industrials, financials and consumer discretionary. We are underweight in the healthcare, real estate and utilities sectors. The overweight in consumer discretionary includes home builders which partially offsets the underweight in real estate. The overweight to industrials reflects our belief that the supply chain shortages seen around the world over the past two years reflect a chronic lack of investment. This is in addition to the need for huge investment needed to meet the decarbonisation agenda and energy security requirements in Europe in the years and decades to come. This is a sector that we believe is significantly undervalued.
Disposals
“We exited our position in Swiss bottle maker Vetropack as we had growing concerns about whether the business was being run as a public or family business. Subsequently, it became apparent that there were great efforts to focus on being a true public company, but the large profit contributions from their Ukrainian factory overwhelmed this effect. We exited our position in Uniphar, a medical technology distributor listed in Ireland, and Swissquote, an online trading platform listed in Switzerland, for valuation reasons.
Outlook
“Interest rates have been at extremely low levels for some time and we believe that removing negative rates in Europe will benefit the health of the banking sector and credit creation. However, we are concerned that central banks, having lost control of inflation, overreact by pushing rates too quickly into an energy shock.Much of the inflation we are experiencing now is likely to die out on its own. do not believe that subdued inflation will persist for the foreseeable future.Therefore, we believe that in the years to come, it will remain important to be conscious of valuation when seeking and evaluating small cap winners from tomorrow.
previous story | next story