The Fund aims to achieve long-term capital appreciation by investing in the equity securities of companies listed primarily on exchanges in Europe, including the UK.

Equity markets continued their recovery rising more than 2% as economic lead indicators continued to improve, further stimulus plans were discussed and vaccination rollouts, after initial setbacks, started to improve. The Fund outperformed despite relative headwinds from the Fund’s structural absence in financials and commodities. The main positive contributors were Swiss solar cell group Meyer Burger and industrials ThyssenKrupp and Rolls Royce.  

In terms of portfolio activity we made two new investments. We completed the purchase of Swiss luxury watch and jewellery group Swatch Group (Market Cap CHF13bn) early in the month. Depressed 2020 sales, down by -32% because of Covid-19, disguise the company’s efforts, started in 2019, to structurally improve its lingering profitability. Testament to the success of these efforts is the fact that H2 2020 margins were flat at 11% versus a year ago, despite sales being down by 18%. With structural headwinds in low-end watches (after several years of declines now less than 10% of company revenue) and mechanical components (sales to third party watchmakers ended in 2020) abating, underlying revenue growth can improve compared to before. Given high operational gearing, strong pricing power, and with continued cost focus, management’s ambition to restore profitability to 15%-20% is credible, despite history not being on their side. Adjusted for net cash of CHF1.7bn, Swatch Group’s normalised equity free cash flow yield exceeds 10%: we believe Swatch Group to be undervalued by +65%.

The other new addition was Atlantic Sapphire (Mkt cap NOK11bn), the largest land-based salmon farmer globally. For several years we have closely followed the salmon farming industry in search for investment opportunities. Health and wellness considerations mean a growing global demand for salmon but supply growth is limited. Salmon farming might be one of the most eco-efficient forms of protein production, it is under rising environmental constraints leading to stricter regulations and extra costs (fish diseases, feedstock costs). Sustainability concerns have increased the cost of sea-based farming and with prices rising as a result, the salmon market has gradually opened a viable opportunity for land-based salmon farming as the latter’s relative cost disadvantages decline. Over the last decade, land-based salmon farming has successfully leveraged technological progress and can also claim superior health credentials with the absence of antibiotics and pesticides, a much greener and shorter value chain (proximity to end consumer) and no impact on sea waters. 

After a decade of R&D at its Denmark facility, Atlantic Sapphire has started commercialising the first harvests from its Florida land-based salmon-farm. With 98% of US salmon consumption imported (70% by air), having local supply saves significantly on transport and gives the company an extra green sustainability and cost competitive advantage.  Atlantic should match the farming cost/kg of large sea-based farmers and combined with customer proximity (freshness) and green label, sustainable price premiums will support solid returns on invested capital (c.20% after tax). All cash flow (and more) is currently reinvested in growing capacity. With expansion licensing permits in place and significant demand unfulfilled, we would expect expansion to be successful. As a result the underlying free cash flow multiple drops rapidly and in four years is less than 10x. At target capacity of 220kt capacity (by 2031)- equivalent to 9% of the current global salmon aquaculture and half the size of the number one aquaculture company Mowi - we estimate the company trades on less than 4x underlying free cash flow. We believe the company to be undervalued today by over 100%.

JOHCM/MSCI Barra/FTSE Group/Bloomberg/Lipper.

Data shown net of fees, net income reinvested.Please note that fund performance is shown against the MSCI Europe NR 12pm adjusted in GBP. Performance of other share classes may vary and is available on request. Data for the period 7 May 2003 to 31 December 2012 is shown against the FTSE Eurofirst 300 TR Index. Where shown, monthly returns table shows compounded discrete monthly performance.

Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The Funds investment include shares in small-cap companies and these tend to be traded less frequently and in lower volumes than larger companies making them potentially less liquid and more volatile.