30
|
THE INVESTOR
THE INVESTOR CENTRE
All information correct as at 31 March 2015
E
uropean equities started 2015 with
a surge.The ECB’s QE and signs of
economic improvements have so far seemed
to outweigh the serious issues with Russia
and Greece. Using the same discount rates
we have always used, the margins of safety in
our portfolio are slim (and non-existent for
much of our‘DreamTeam’). Investors using
discount rates built upon ultra-low interest
rates would arrive at substantially higher
estimates of intrinsic value.We run the risk
of selling some of our holdings too early
because of our conservatism and not fully
participating if central bank stimulus and
low rates persist, and begin in ating asset
prices to speculative levels.We sold our stake
in GlaxoSmithKline (GSK) this quarter.
We earned a total return of approximately
42% over more than ve years, modestly
outperforming the European market. GSK
has experienced continued operational and
drug development issues, a degradation in
earnings quality and, most recently, troubled
drug launches in its important respiratory
area. GSK’s earnings have declined by more
than 20% cumulatively since 2009 and we
think continued headwinds are likely in the
medium term. Our return was generated
from a high dividend yield and valuation
multiple expansion from 11 to 19 times our
estimates of cash earnings.
BURGUNDY
Joint manager: Greater European
and Greater European Progressive
GSK sold after outperforming
European market for past five years
We run the risk of
selling some of our
holdings too early
Kenneth A. Broekaert
T
wo themes dominated the equity
markets of 2015’s rst quarter: low
commodity prices (particularly oil) and a
strengthening US dollar.The former acted
as a boost to world consumer economies
by reducing in ationary pressures, while
the latter re ected the strength of the US
economy and its potential to raise interest
rates earlier than its trading partners.
Predictably, energy and other commodity
investments did poorly, while most other
sectors prospered. Currencies were a major
determinant of results, with US dollar-based
investors seeing paltry returns, while
foreign investors in US securities saw
signi cant currency appreciation. Eurozone
investors, in particular, experienced the
transitory joys of a weak currency as the
ECB belatedly joined the currency
depreciation sweepstakes.The euro has
been by far the weakest major world
currency in 2015 to date.The prospect for
future returns is critically related to the
potential for interest rate increases in the
US. For our part, we think the Fed will be
extremely careful about raising short-term
interest rates, only doing so when it can no
longer avoid it. Returns so far in 2015 have
been quite strong across the board.While
this means we have a challenging time
nding good value in the markets, it also
re ects the strong fundamental position of
our portfolio companies.
BURGUNDY
Joint manager: Worldwide Managed
and Worldwide Opportunities
ECB joins currency depreciation
sweepstakes thanks to weak euro
The Fedwill be careful
about raising short-
term interest rates
T
he fund made a very encouraging start
to the year, with the gains seen in March
comfortably overriding initial weakness.These
gains have primarily come from a number of
core long-term positions, with stock-speci c
news ow contributing to the return. Short
positions have detracted, with the pair book
making little impact. Essentra was the largest
contributor to returns, with the company
comfortably beating earnings expectations.
Shares in the online betting exchange
platform Betfair have enjoyed signi cant
gains as business momentum continues, with
investment into marketing spend translating
into good customer traction.A short position
in UK food retailers was the largest detractor.
Following Christmas trading, shares in the
listed supermarkets experienced some
respite, though sales growth remains negative.
We believe there is more pain ahead from the
long-term changes in consumer behaviour.
Attention is shifting towards the rst US
interest rate rise, expected in the summer, and
the UK general election.While a number of
equity markets have hit new highs, bond yields
in many markets are pointing to a period of
de ation and central bank deposit rates creep
further into negative territory.The advantage
of an absolute return strategy is the ability to
deliver a return stream from equities that are
largely independent of the level of the equity
market.The investment backdrop continues
to support our bottom-up approach targeting
exactly that.
BLACKROCK
UK Absolute Return
Betfair enjoys significant gains, but
more pain ahead for supermarkets
A short position in
UK food retailerswas
the largest detractor
Nigel Ridge
Richard Rooney
