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.

European equity markets fell in September as mixed economic data, fresh spikes in Covid-19 cases and the reintroduction of new restrictive measures tested market sentiment. 

The Fund underperformed slightly as strong positive contributions from Swiss solar cell equipment vendor Meyer Burger and consumer electronics retailer Ceconomy cushioned the falls in United Internet, ThyssenKrupp and Rolls-Royce (despite its small weight in the Fund).
 
United Internet’s share price declined 20% as the company unexpectedly cut its annual run-rate earnings guidance by some 13% to reflect higher wholesale costs for its mobile virtual network operator (MVNO) activities. Whilst management disputes the legal validity of these extra costs charged by network operator Telefonica Deutschland, until a legal settlement is reached these extra costs (even if reversed at a later a stage) needed to be reflected in their guidance. The positive investment case for a 5G network buildout is reinforced by higher wholesale costs, but a prolonged period of legal uncertainty regarding mobile wholesale pricing obscures the mid-tem cash flow picture. We therefore reduced our exposure and sold our small position in the listed subsidiary, Drillisch. 

Elsewhere negative Covid-19 sentiment drove ThyssenKrupp and Rolls-Royce lower. We added to the former as its large net cash position - even after adjusting for negative cash flow - implies a negative value for its operations; we disagree. We maintain our position in Rolls-Royce and await the “most anticipated rights issue in the world”. We see it as an opportunity to buy into a de-risked quality value play.  
 
We invested in packaging solutions supplier SIG Combibloc (€5.1bn market cap). The company re-listed two years ago after the company was taken over by a private equity company in 2008. SIG Combibloc is the global number two aseptic carton solutions supplier (21% global market share) with €1.8bn of sales. Aseptic carton packaging is a niche market for sterile food packaging applications (mainly liquid dairy, non-carbonated soft drinks and liquid food). Global usage is steadily growing because of food safety priorities, green credentials and under-penetration in emerging markets. SIG’s business model combines the engineering and selling of complex filling systems with the sale of proprietary packaging consumables (i.e. the sleeves or predesigned packaging boxes) under (typically) 7-year lease agreements whereby consumable prices are reset annually as a function of anticipated volumes and raw material costs. SIG has an installed base of over 1,200 filler machines whose economic life exceeds 20 years, as customers’ reluctance to change is reinforced by their own food safety reputation. These dynamics create high barriers to entry, reinforce capacity to innovate and explain why SIG and industry leader Tetra Pack (privately-owned) have a combined market share of 87%. SIG’s revenue and cash flow is very steady and predictable (like the razor/razorblade business model). Moreover, as customers on average pay some 30% of the initial filling machine investment upfront, SIG’s payback on an installed filler system is less than three years and net tangible returns exceed 25%. On short-term earnings multiples, the value opportunity in SIG does not appear that obvious, but objective financial characteristics and consistent valuation assumptions imply an intrinsic value of €7bn, CHF24 per share, which implies some +35% upside.
 
Apart from Drillisch, we also sold Reckitt Benckiser. After an excellent performance this year largely because of Covid-19 tailwinds, Reckitt’s share price reached our fair value. We also sold our small position in Siemens Energy. The Siemens Energy shares were obtained at the end of the month from the Siemens spin-off. However, with the majority of Siemens Energy valuation determined by the price of its listed, overvalued wind turbine subsidiary SiemensGamesa, and the Fund already exposed to other energy technology companies (such as Wartsila and Burckhard Compression, both with much more upside potential) we felt the risk/reward unattractive.

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.