European 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 several positions, including ALK-Abellò (Denmark: Health Care), Admiral (United Kingdom: Financials) and Spirax Group (United Kingdom: Industrials) due to valuation concerns and Alfen (Netherlands: Industrials) after issues around stock reduction, management change, and slowing end customer markets.

We bought Ashtead Group (United Kingdom: Industrials), which rents construction and industrial equipment to a range of customers in the United States and further afield. Ashtead is run by an excellent management team who have reinvested income into the business. They have consolidated the market of equipment rental services by buying small-scale providers. The business model of equipment rental favours large-scale businesses with geographic reach, a wide range of products, and excellent customer service. We believe Ashtead is in a strong and still strengthening position. They should also benefit from strong sustainability opportunities (tailwinds), not only by helping to maximise equipment life and responsible disposal, but also by leasing equipment needed in infrastructure investment across areas such as semiconductors, electric vehicles (EVs), and renewable energy.

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 DiscoverIE (United Kingdom: Industrials), a manufacturer of niche electronics and manufacturing businesses. We also took the opportunity to add to our investment in Endava (United Kingdom: Information Technology) which suffered a sharp reduction in share price over market concerns about weaker discretionary spend from customers. While the company may face short-term uncertainty due to the overall economic environment, we feel confident backing its culture, management and long-term growth potential.

Judges Scientific (United Kingdom: Industrials), the largest position in the strategy, continues to demonstrate resilient growth, and we remain excited about its potential, given it is still early on in its growth journey.

Valuation concerns and a need to manage position sizes led us to trim our investments in Ringkjøbing Landbobank (Denmark: Financials), Nemetschek (Germany: Information Technology) 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 Komerční banka (Czech Republic: Financials) to make room for two faster growing eastern European companies: Dino Polska (Poland: Consumer Staples), 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 long-term capital preservation as the bedrock of capital growth, and on 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 43 portfolio holdings rose over the quarter. Valuation concerns and a need to manage position sizes led us to trim positions in Admiral (United Kingdom: Financials), bioMérieux (France: Health Care), Atlas Copco (Sweden: Industrials), DHL Group (Germany: Industrials), and Infineon Technologies (Germany: Information Technology). 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 five holdings and introduced seven 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 DiscoverIE (UK: Industrials), a serial acquirer of niche electronics design and manufacturing businesses, de-rated against an uncertain macro backdrop and concern that higher interest rates will curtail the growth contribution of acquisitions.

Positive contributions came from Admiral Group (UK: Financials), a UK auto and home insurance provider; Bechtle (Germany: Information Technology), a pan-European provider of IT infrastructure and services; and EPAM Systems (US: Information Technology), the Eastern European IT consulting and digital transformation services company which was added to the portfolio in Q2.

Two new companies were brought into the portfolio last quarter. 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 positions in Beiersdorf (Germany: Consumer Staples) and Unilever (UK: Consumer Staples). We also added to several holdings as they became more attractively valued, including Adyen (previously mentioned), Indutrade (Sweden: Industrials), an industrial holding company with over 200 subsidiaries; Assa Abloy (Sweden: Industrials), a leader in locks, doors and intelligent security systems; and Roche (Switzerland: Health Care), a developer of biologic drugs for rare diseases and in-vitro diagnostics.

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; and Bechtle and Admiral (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.