Strategy highlights: a focus on quality and sustainability
Strategy update: Q4 2023
European (ex UK) Sustainability strategy update: 1 October - 31 December 2023
Strong performance in Q4 propelled overall performance for the year convincingly into positive territory. Nonetheless 2023 will be remembered for market turbulence and fluctuations in the performance of the strategy.
The period from August through to October was especially difficult. Many macroeconomic worries that had weighed on equity markets at different times earlier in the year came to a head: monetary and fiscal policy tightness across European economies, the threat of recession and stagnation, falling real wages, declining household savings and spending, vulnerable housing markets, and slowing demand from China.
However, sentiment improved markedly in the final quarter as a consensus emerged that interest rates have peaked. Yields plummeted and valuations rose as markets celebrated a more benign inflation outlook and the possibility that the monetary policy tightening cycle is over, the industrial cycle turning, and demand recovering.
All but six of the 40 portfolio holdings rose over the quarter. Valuation concerns and a need to manage position sizes led us to trim positions in Atlas Copco (Sweden: Industrials), Infineon Technologies (Germany: Information Technology), DHL Group (Germany: Industrials), and Beiersdorf (Germany: Consumer Staples). We also sold the small remaining position in Rational (Germany: Industrials). The company has a limited range of products which we are concerned could face growing competitive and pricing pressures.
We made no new purchases, but took advantage of attractive valuation opportunities to increase shareholdings in EPAM Systems (United States: Information Technology), Jerónimo Martins (Portugal: Consumer Staples), Alfen (Netherlands: Industrials), Elisa (Finland: Communication Services), and Judges Scientific (United Kingdom: Industrials).
Over the course of the year our main concerns were to: 1) maintain and improve portfolio diversification and defensiveness; 2) maintain valuation discipline; and 3) take advantage of compelling valuation opportunities. In total we sold out of three holdings and introduced four new names into the portfolio.
We replaced a few industrial companies because they became too expensive and/or their competitive positioning less convincing to us: Beijer Ref (Sweden: Industrials), Nibe Industrier (Sweden: Industrials), and Rational (mentioned previously). Two new industrial companies we brought into the portfolio: Teqnion (Sweden: Industrials) and Addtech (Sweden: Industrials). Both have contributed positively to performance. The other two new positions were in EPAM Systems (mentioned previously) and Endava (United States: Information Technology). Both looked beaten up when we bought them, and both have strengthened since.
The most disappointing aspect of performance in 2023 was the damage done by the health care holdings, many of which were among the larger portfolio positions, precisely because we expect them to be resilient and steady compounders over the long term.
Four of the five largest detractors from performance were DiaSorin (Italy: Health Care), Roche (Switzerland: Health Care), Carl Zeiss Meditec (Germany: Health Care), and Tecan (Switzerland: Health Care). The other big detractor was Alfen (Netherlands: Industrials). We could have been less eager and slower adding to all five holdings as they fell.
The top five performance contributions in 2023 came from holdings in Inficon (Switzerland: Information Technology), Atlas Copco, Teqnion, DHL Group, and Endava (all mentioned previously); we reduced shareholdings in all except Teqnion and Endava.
We have no ability to forecast markets, though it wouldn’t surprise us if 2024 presents a complex market environment with contradictory forces and signals. Optimism about equities may be running higher than it has for a couple of years, but markets have been swift to price in lower interest rates and some company valuations are already starting to look stretched. Easier financial conditions may be on the horizon, but money and credit remain tight in many economies. We may not yet have seen the full impacts of the tightening cycle we have been through. If economic activity fails to pick up, or contracts, company earnings could come under renewed pressure, and balance sheet strength and liquidity could be tested.
We enter 2024 with a portfolio of what we believe to be adaptable, high-quality, great sustainability companies, with consistent cash flow capabilities, and strong competitive positions in different market segments. The leaders of these companies understand the value of staying close to their customers. They steward their balance sheets carefully. They ensure their companies are as well placed to deal with emergent risks as they are to capitalise on long-term opportunities.
We will stay focused on the long-term, fundamental prospects of the companies we hold and those we are watching closely. Although we like the composition and shape of the portfolio, we will keep searching for companies that might improve overall portfolio risk-return characteristics. We will be vigilant about trimming holdings that become expensive and adding to those that present compelling valuations opportunities.
Strategy update: Q3 2023
European (ex UK) Sustainability strategy update: 1 July - 30 September 2023
In what was a turbulent quarter for many financial markets, European equities felt the chilling effects of fears about recession and economic stagnation in the eurozone, rising yields, persistent monetary and fiscal policy tightness, resurgent energy prices, falling real wages, a depletion of household savings built up during the pandemic, lacklustre retail spending, fragile housing markets, and slowing demand from China.
The strategy registered a painful decline, more than erasing the gains of the first half of the year. The share prices of all but a quarter of portfolio holdings fell, and a handful experienced double-digit declines. The largest negative contribution came from Adyen (Netherlands: Financials), a facilitator of e-commerce, mobile, and point-of-sale payments. The share price fell sharply after the company reported weaker US revenue growth and margin pressure arising from increased hiring.
Alfen (Netherlands: Industrials) a provider of smart grids, electric vehicle (EV) charging stations and energy storage solutions, also fell as sales in their EV charging station segment weakened due to customer destocking. And Infineon Technologies (Germany: Information Technology), a provider of semiconductors for the auto, industrial and power management sectors, weakened due to market uncertainty and concerns about Chinese capabilities and intentions to localise the production of certain semiconductor devices.
Positive contributions came from EPAM Systems (US: Information Technology), the Eastern European IT consulting and digital transformation services company which was added to the portfolio in Q2; Bechtle (Germany: Information Technology), a pan-European provider of IT infrastructure, equipment and services; and Endava (US: Information Technology), which was only recently added to the portfolio and is discussed below.
Two new companies were brought into the portfolio. Addtech (Sweden: Industrials) is a family-stewarded acquirer and long-term owner of more than 150 electrification, clean energy, automation, and process technology businesses. These tend to be relatively small private businesses with leading market positions, led by exceptional management teams. The business model is highly decentralised and the acquisition philosophy fosters entrepreneurship, collaboration and accountability. We took advantage of a compelling opportunity after the company de-rated.
Endava (US: Information Technology) was also added to the portfolio as its valuation became attractive. It is a founder-controlled provider of digital transformation consultancy services, mainly to customers active in payments, financial services and the technology, media and telecommunications sector. An entrepreneurial, flexible, team-focused culture has enabled successful expansion and scaling of the business. Around three-quarters of the workforce are in the greater-European region, but Endava’s revenue base and delivery footprint are expanding in the Americas and Asia.
In an effort to further improve portfolio diversification and resilience, we increased the position in Beiersdorf (Germany: Consumer Staples). We also added to several holdings as they became more attractively valued, including Adyen and Infineon Technologies (both mentioned previously); Indutrade (Sweden: Industrials), an industrial holding company with over 200 subsidiaries; and Carl Zeiss Meditec (Germany: Health Care), a maker of ophthalmic devices and microsurgery visualisation technologies.
Caution about valuations, position sizes and risk-return prospects led us to trim positions in Vitec Software (Sweden: Information Technology), a serial acquirer of leading niche software businesses; Sartorius (Germany: Health Care), a provider of laboratory and drug development technologies; ALK-Abelló (Denmark: Health Care), the global leader in allergen immunotherapy treatments; Komerční banka (Czech Republic: Financials); and Bechtle (among the positive contributors mentioned previously)
Economic risks and headwinds are intensifying and multiplying. We ask ourselves repeatedly if the portfolio is as resilient as it can be. We have conviction in the quality of the companies we hold, and we like the composition and shape of the portfolio. However, we never stop searching for companies that might improve overall portfolio risk-return characteristics.
Patience and a long-term focus are especially important at a time like this. We challenge ourselves to look through short-term noise and take advantage of attractive valuation opportunities. And we remain just as vigilant about trimming positions in companies whose valuations become stretched.
Strategy update: Q2 2023
European (ex UK) Sustainability strategy update: 1 April - 30 June 2023
In order to gauge a company’s performance prospects, we must try to grasp the context in which it operates. Seen through the abstract lens of news, the world usually seems profoundly chaotic, hostile, erratic and unfathomable. The world may be all these things, but all these things are not the singular context in which companies operate. We need a different, better frame of reference.
The more uncertain the political economy context and market conditions get, the harder and closer we look at what we can best make sense of: companies, and how well they deal with the particular contextual challenges they face and foresee. Companies are of course impacted by developments in the political economy and financial markets, but company leaders deal with the manifestations of these things in amongst the practical realities of employees, customers, supply chains, production facilities, distribution channels, and regulatory environments.
Performance over the quarter was mixed. Encouraging results and positive trading outlooks boosted the share prices of Jerónimo Martins (Portugal: Consumer Staples), the leading supermarket operator in Poland; Atlas Copco (Sweden: Industrials), a maker of compressors, vacuums, and industrial assembly technologies; and Teqnion (Sweden: Industrials), a serial acquirer of a wide range of specialised industrial and technology businesses, which was bought at the start of the year.
Companies that dragged most on performance included Carl Zeiss Meditec (Germany: Health Care) – a maker of ophthalmic devices and microsurgery visualisation technologies – which fell after the company confirmed slower growth in China due to covid infection waves and lockdowns earlier in the year; Sartorius (Germany: Health Care) – a provider of laboratory and drug development technologies – which issued a profit warning due to falling sales as biopharma customers run off inventories built up during the pandemic; and ALK-Abelló (Denmark: Health Care) – the global leader in allergen immunotherapy treatments – which fell when first quarter data showed softer European tablet sales growth.
One new company was brought into the portfolio. EPAM Systems (US: Information Technology) is a founder-controlled, Eastern European IT services company that is helping accelerate digital transformation and productivity gains for its clients. EPAM is known in its field as the developers’ developer. The exceptional platform engineering and software development skills of its workforce, most of whom are based in Eastern Europe, and a full consult-design-engineer-operate model, have enabled it to establish long-term relationships with leading companies in over 35 countries worldwide.
We continued building the position in Teqnion (Sweden: Industrials), among the main performance contributors mentioned above. We also added to several holdings as they became more attractively valued, including Alfen (Netherlands: Industrials), a provider of electric vehicle charging stations as well as smart grid and energy storage solutions; Assa Abloy (Sweden: Industrials), a global leader in locks, doors and intelligent security systems; and Roche (Switzerland: Health Care), a developer of biologic drugs for cancer and rare diseases as well as in-vitro diagnostics. Valuation concerns were the main reason for trimming positions in Vitec Software (Sweden: Information Technology), a serial acquirer of leading niche software businesses; Elisa (Finland: Communication Services), the market leader in telecommunications and digital services in Finland; and Inficon (Switzerland: Information Technology), a maker of niche gas detection equipment and sensors.
We seek out exceptional leaders of companies with adaptable franchises and solid balance sheets – companies that can thrive in good times as well as bad. We strive to hold companies which, in combination, can help make the portfolio resilient across a range of fast-fluctuating market environments. The goal of consistently good performance in all circumstances can never be attained, but we aim for consistency in as many different market environments as possible, which we believe is the best way to deliver good overall performance over the long term.
Strategy update: Q1 2023
European (ex UK) Sustainability strategy update: 1 January - 31 March 2023
The geopolitical and macro environment has been lurching from one crisis to the next.
This time last year, it seemed covid might be coming under control and supply chain bottlenecks were easing. Then war broke out in Europe, energy and food prices rose sharply, and different supply chain issues emerged. We entered a new era of rising interest rates and inflation, which ushered in considerable market turbulence. This quarter’s ‘macro shock’ has come from banking failures (and bailouts - again) in both the US and Europe.
Against this backdrop, the strategy’s performance over the quarter was satisfactory – helped, in part, by limited exposure to banking stocks. We have long been unconvinced about the prospects for most traditional developed market banks, and the strategy only has modest positions in smaller, country or regionally-focused banks with strong financial quality. These include Ringkjøbing Landbobank, a niche Danish bank, Handelsbanken, a conservative Swedish bank, Bankinter, a high-quality Spanish bank, and Komerční banka, the third-largest bank in the Czech Republic. Positions in these banks have been relatively small since the inception of the strategy, and we substantially trimmed our holding in Ringkjøbing Landbobank earlier this year due to valuation concerns.
Performance over the quarter was boosted by strong results from Infineon Technologies (Germany: Information Technology), a producer of semiconductors for the auto, industrial and power management sectors; Deutsche Post DHL Group (Germany: Industrials), the world’s largest logistics provider; and INFICON (Switzerland: Information Technology), a maker of gas analysis and leak detection devices.
Companies which dragged on performance included Roche (Switzerland: Health Care), a maker of biologic drugs for cancer and rare diseases which struggled with a couple of failed drug trials; and DiaSorin (Italy: Health Care), a maker of immuno and molecular diagnostics equipment which was weaker due to a greater-than-expected pullback in covid-related sales; and Alfen (Netherlands: Industrials) a maker of electric vehicle charging stations and smart grid technologies which expects slowing growth in EV charging sales in 2023.
We added one new company to the portfolio, Teqnion (Sweden: Industrials), which is a serial acquirer of electronics design and manufacturing businesses. We tend to like serial acquirer companies because they offer exposure to a broad range of specialised businesses and they provide attractive risk/return characteristics due to their diversified revenue streams.
We sold out of two companies, Beijer Ref (Sweden: Industrials) and NIBE Industrier (Sweden: Industrials), both due to valuation reasons. Beijer Ref distributes HVAC and refrigeration technologies, and NIBE Industrier sells heat pumps and other sustainable solutions. Both have been beneficiaries of positive sentiment around green incentives from the EU and US, and valuations became increasingly uncomfortable.
During the quarter we added to a number of holdings that became more reasonably valued. These included Nexans (France: Industrials), a maker of cables used in the generation and transmission of renewable energy, and DiaSorin and Alfen, as mentioned above. We also trimmed Tecan (Switzerland: Health Care), a maker of laboratory automation devices; Beiersdorf (Germany: Consumer staples), a maker of personal-care products and adhesives, and Ringkjøbing Landbobank (Denmark: Financials), all for valuation reasons.
As ever, we remain focused on the long term, and on ensuring the portfolio is as resilient as possible. We believe the best way to accomplish this aim is by running a diversified portfolio of high-quality companies with strong and conservative financials, exceptional stewardship, and sustainability tailwinds.
Proxy voting: Q4 2023
European (ex UK) Sustainability proxy voting : 1 October - 31 December 2023
During the quarter there were 28 resolutions from two companies to vote on. On behalf of clients, we did not vote against any resolutions.
Proxy voting: Q3 2023
European (ex UK) Sustainability proxy voting : 1 July - 30 September 2023
During the quarter there were 32 resolutions from two companies to vote on. On behalf of clients, we did not vote against any resolutions.
Proxy voting: Q2 2023
European (ex UK) Sustainability proxy voting : 1 April - 30 June 2023
During the quarter there were 408 resolutions from 23 companies to vote on. On behalf of clients, we voted against ten resolutions.
We voted against Alcon’s remuneration report as well as the Board and Executive remuneration, as we believe it is excessive and the company has signalled that they want to keep ratcheting. (three resolutions)
We voted against Assa Abloy’s remuneration report and long-term incentive plan as we believe the CEO’s remuneration is excessive and do not think earnings per share is an appropriate metric for a serial acquirer and instead it should make reference to returns on capital. (two resolutions)
We voted against the appointment of the auditor at Beiersdorf, bioMérieux, Elisa, LEM Holdings and SFS Group as they have been in place for over 10 years and the companies have given no information on intended rotation. We believe rotating an auditor on a relatively frequent basis (e.g. every 5-10 years) helps to ensure a fresh pair of eyes are examining the accounts, and follows best practice. (five resolutions)
Proxy voting: Q1 2023
European (ex UK) Sustainability proxy voting : 1 January - 31 March 2023
During the quarter, there were 259 resolutions from 12 companies to vote on. On behalf of clients, we voted against six resolutions.
We voted against the appointment of the auditor at Indutrade, Infineon Technologies, Novozymes and Ringkjobing Landbobank as they have been in place for over 10 years and the companies' have given no information on intended rotation. We believe rotating an auditor on a relatively frequent basis (e.g. every 5-10 years) helps to ensure a fresh pair of eyes are examining the accounts and follows best practice. (four resolutions)
We voted against two shareholder proposals requesting Handelsbanken change their IT management software, as well as allocate funds and participate in the formation of an integration institute with operations in the Öresund region. We believe management are best placed to decide the day-to-day operations of the business. (two resolutions)
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For illustrative purposes only. Reference to the names of example company names mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors. Holdings are subject to change.
Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon Stewart Investors’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will last, and Stewart Investors undertakes no obligation to correct, revise or update information herein, whether as a result of new information, future events or otherwise.
Source: Stewart Investors investment team and company data. Securities mentioned are all investee companies* from representative Asia Pacific Sustainability Strategy, Asia Pacific & Japan Sustainability Strategy, Asia Pacific Leaders Sustainability Strategy, European Sustainability Strategy, European (ex UK) Sustainability Strategy, Global Emerging Markets Leaders Sustainability Strategy, Global Emerging Markets Sustainability Strategy, Indian Subcontinent Sustainability Strategy, Worldwide Sustainability Strategy and Worldwide Leaders Sustainability Strategy accounts as at 31 December 2023. *Assets that the strategies may hold which an active decision has not been made, and sustainability assessment does not apply, include cash, cash equivalents, short-term holdings for the purpose of efficient portfolio management and holdings received as a result of mandatory corporate actions. Holdings of such assets will not appear on Portfolio Explorer.
The Stewart Investors supports the Sustainable Development Goals (SDGs). The full list of SDGs can be found on the United Nations website.
Source for Climate Solutions and impact figures: © 2014–2024 Project Drawdown (drawdown.org). Source for Human Development Pillars: Stewart Investors investment team.
Source for climate solutions and human development analysis and mapping: Stewart Investors investment team. Contributions are defined by the team as demonstrable contributions to any solution, either direct (directly attributable to products, services or practices provided by that company), or enabling (supported or made possible by products or technologies provided by that company).