fundtruffle

SW Mitchell’s European funds’ update suggest the region is back to winning ways

News Team, 12/12/2019

Boutique asset manager SW Mitchell’s November update on both their European long only fund and its absolute return smaller cap sibling show a stark contrast between the two strategies. The long only fund is beating its benchmark by 35 basis points while its absolute return small cap product trailed by 4.4 percentage points. Does this show the problems with using an absolute return strategy or is it representative of a resurgent continent, recovering from its earlier travails?

The SWMC Small Cap European fund was badly hurt by not only mistakes in its long book but also errors in its bets on which firms would struggle. Although not mentioned in fund manager’s Jamie Carter’s commentary for the month, its Eddie Stobart’s position detracted one percent from the fund’s performance in November. The spin-off from parent company Stobart’s problems have been well signposted, with long term thorn in the side Andrew Tinkler, former CEO of Stobart Group, continuing to present problems for the company (both parent and spin-offs).  

In a long running saga, Eddie Stobart saw its shares suspended from trading following an accounting scandal during the summer and more recently a high interest loan rescue bid from private equity firm Dbay Advisors which would hold off the company’s creditors for a while. Mr Tinkler meanwhile presented to the company’s shareholders a rival bid through his TVFB vehicle which was quickly rebuffed by Eddie Stobart’s board. In the world of long/short equity investing, it would be easy to point out that a short position on the stock would have brought the greater returns, given its share price crashed from 71p to just 6p between being suspended and opening again. However, Neil Woodford held approximately 23 percent of the company at one point and given the share price, it represents a great entry point, despite the real possibility of having to pay back Dbay’s proposed PIK loan.

It’s been far plainer sailing in the medium to large cap SWMC European Fund. With a potent mix of growth and value stocks, the fund is following the upward trajectory of the European equities market as a whole (and exceeding it, after fees). While many market participants were concerned that weak third quarter earnings results would unveil those companies trading on unrealistic price-to-earnings multiples, fund manager Edward Mitchell’s stock picks have managed to find the winners.

Top contributor for November was Delivery Hero, whose Q3 results exceeded analyst forecasts driven by better than expected American revenues. This led management to upgrade its full year revenue guidance by over EUR 100 million to EUR 1.5 billion.

Remarking on how the macro economic backdrop is benefitting the fund, manager Stuart Mitchell said: “On a price to book valuation the market is trading at a 50% discount to the US and is ranked in the first percentile of ‘cheapness’ as measured over the last 40 years.”

The fund played this value card by taking a position in BASF, a German chemicals company. Trading at just 12-times forward price-to-earnings, it has a dividend yield approaching 5 percent while in 2018 generated a return on equity of 15 percent. The company is also somewhat of a moat investment especially in terms of crop protection. It enjoys a 19 percent share of the fungicides market, with 13 and 12 percent of herbicides and sprays market respectively.

Mr Carter, manager of the small cap fund, ended his November commentary with: “This [bullish investor mood] has coincided with meaningful flows, for the first time in 36 months, into both European and UK equities. If there is a strong election result on Thursday, we think this trend could well continue and markets may end the year on a positive note.” Given the fund has far more long positions than short, more buoyant markets would prove useful to the strategy.

About PAM

PAM Insight is the world’s leading independent provider of essential specialist news, analysis and comparative data for the fast-evolving world of wealth management.

Read more about PAM

Subscribers

Dedicated to serve both investors and fund companies, fundeye.com aims at becoming the preferred publication platform for market professionals.

Read more