Having entered 2017 believing that the world had shifted from a “growth” to a “value” market we note that European equities have fared well versus US counterparts since the Presidential election. With the fall in bund yields “growth” stocks resumed their outperformance in February while March saw a reversal in sector leadership as banks recovered some of the ground lost the prior month. This reminds us that equities continue to be sensitive to bond yield gyrations and associated inflation expectations. Indeed, this is at the heart of the continuing tug of war between “growth” and “value” stocks. In the former camp, we detect that a number of mid caps in particular look stretched.
The fund’s net asset value (NAV) rose by 5.3% in the quarter compared with a rise of 7.5% in the benchmark index.
The materials sector was the strongest contributor to alpha over the quarter following bids for Akzo Nobel from US peer PPG. While there has been some resistance from Akzo Nobel management to engage with the US company we believe the deal makes strategic sense and therefore an agreement should be reached. At a stock level the fund benefited from its industrials holdings Volvo and Sandvik and its financials holdings Caixabank and Danske Bank.
The consumer discretionary sector lagged as automotive safety systems manufacturer Autoliv’s share price has been weak due to slower recent growth in active safety. Additionally, in passive safety, it has seen pressure on near term margins following a high volume of engineering projects in order to meet strong order intake. We reduced our holding.
|Discrete year performance
Selected Opportunities Fund (%)
|FTSE World Europe
(ex UK) Index (%)
|1 year to 31/03/2017
|1 year to 31/03/2016
|1 year to 31/03/2015
|1 year to 31/03/2014
|1 year to 31/03/2013
: Morningstar, at 31 March 2017, nav-nav, net income reinvested, net of fees, Class A Acc shares, in Sterling. Past performance is not a guide to future performance. Prices can go up and down and you may not get back the amount originally invested. NAV = net asset value.
Fund activity review
The fund’s tilt back towards so called "value" has been strengthened by our addition of names such as Trelleborg, which is benefiting from self help measures being implemented by management, and Italian agricultural machinery manufacturer CNH Industrial, where we foresee strong potential for earnings growth independent of the recovery in the agricultural equipment market. Following a meeting with management we added international beverage manufacturer Pernod where we believe the earnings growth outlook has improved.
In the banks sector we disposed of our holding in Credit Suisse as financial results were mixed and we initiated a position in Italian bank UniCredit where capital targets now look credible and its balance sheet issues have been tidied up. We continue to monitor inflation expectations as a key input to our banks positioning. During the quarter we reintroduced AstraZeneca to rebuild exposure to the pharmaceutical sector after a period of underperformance. In the same sector we sold UCB while other disposals included ISS and Deutsche Telekom.
Fund positioning and manager's outlook
European equities have performed well compared with their US counterparts since the US election. This is as it should be: Europe is more of a value construct than the S&P and our thesis remains that, providing the latter holds steady, Europe will have a strong year. The wall of worry continues to be scaled.
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