European (ex UK) Sustainability

This volatility brought opportunities to build positions in companies we believe are well-positioned for the long term, such as our IT services holdings, Endava (United States: Information Technology) and EPAM Systems (United States: Information Technology). Despite short-term pressure on customer budgets, the long-term opportunity of digitalisation remains an exciting area of growth for both companies.

We also added to a number of existing holdings, including Dino Polska (Poland: Consumer Staples), admiring their consistent approach in a fast-growing retail market, Vitec Software (Sweden: Information Technology) which has strong financials and the global leader in locks, Assa Abloy (Sweden: Industrials).

We sold three positions, including ALK-Abellò (Denmark: Health Care) due to valuation concerns, and uncertainties relating to their market development in the United States, and Alfen (Netherlands: Industrials) after issues around stock reduction, management change, and slowing end customer markets. A small remaining position in Komerční banka (Czech Republic: Financials) was also sold as we had lower confidence in the quality of the company.

We also bought Air Liquide (France: Industrials), which supplies industrial gases such as oxygen, argon, hydrogen, and helium to a range of end customer markets, including healthcare, manufacturing, and electronics. The company is well-positioned within a market without too many competitors; pricing is both fair and linked to inflation, and the products are often essential for their customers’ day-to-day operations. In addition to building on their century-old core business, Air Liquide are exploring new areas of growth in carbon capture and green hydrogen. It has invested in 200 megawatts of planned hydrolyser capacity in Normandy as part of their target to invest EUR8 billion to reduce emissions from hydrogen production by 2035¹.

During the quarter we took the opportunity to build up some of the newer positions we added in 2023, including Teqnion (Sweden: Industrials), the founder owned, serial acquirer of diverse businesses; Nexans (France: Industrials), the maker of electrical cabling used in renewable energy, and Addtech (Sweden: Industrials), a long-term owner of 150+ electrification, clean energy, automation, process technology businesses. We also took the opportunity to add to Elisa (Finland: Communications Services) which became more reasonably priced due to slower business growth than expected in the short term.

Valuation concerns and a need to manage investment sizes led us to trim positions in Ringkjøbing Landbobank (Denmark: Financials), Novonesis (Denmark: Materials) and Adyen (Netherlands: Financials). Adyen had a particularly strong quarter, rising more than 145%¹ since a period of weakness last year.

Over the course of the quarter, we sold Tomra (Norway: Industrials) to make room for two faster growing eastern European companies: Dino Polska (Poland: Consumer Staples), a low-cost grocery retailer, and Allegro (Poland: Consumer Staples), Poland’s number one e-commerce platform that is expanding into Eastern Europe.

As ever, we continue to focus on managing investment risk as much as growing clients money, and ensuring the portfolio can weather most economic environments. Looking forward, we are excited by the quality, and diverse nature of the companies we hold, and their ability to contribute to, and benefit from, sustainable development.

1 Source: Factset

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.

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.