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THE INVESTOR
THE INVESTOR CENTRE
All information correct as at 30 June 2015
H
igh past returns, which have resulted
in high valuations at present, are
likely to result in lower future returns.The
current price-to-earnings (P/E) ratio of
our European portfolio, at approximately
18 times, is currently higher than the last
two market peaks in March 2000 and June
2007.While absolute valuations demand
caution, the combination of quality and value
in our portfolio represents a compelling
investment relative to the weaker alternatives
of lower-quality equities or bonds. If interest
rates stay low for a long time (as in Japan),
equity valuations are reasonable. If interest
rates continue to rise, equity returns over
the next few years are highly unlikely to
match those of the past few years. During
the quarter we sold our shares of Sano , due
to a lack of conviction in its fundamentals
and a valuation of more than 20 times our
estimate of cash earnings.We bought Sano
in September 2009 and earned a 10%
return in the following ve months.We then
substantially trimmed our Sano position
and eventually deployed the proceeds into
Novartis and Roche. Our return on our
small Sano position, since February 2010,
was approximately 165% cumulative or
10% annualised, substantially less than our
portfolio return. In the current environment
we are ensuring that, more than ever, we have
conviction in our companies’ fundamentals,
while also avoiding excessive valuation.
BURGUNDY
Joint manager: Greater European
and Greater European Progressive
Sanofi shares sold in favour of new
position in Novartis and Roche
Our portfolio
represents a
compelling investment
Kenneth A. Broekaert
P
olitics and currency movements
overwhelmed economic considerations
in the second quarter of 2015. Brinkmanship
associated with the Greek situation led
to higher interest rates and lower stock
markets throughout the eurozone and its
adjacent region. In the rest of the world,
stock markets generally marked time in the
absence of strong economic signals, with
the surprise exception being China, whose
equity markets have boomed since last
autumn. It was the turn of sterling investors
to experience the e ects of a strong currency
as the pound strengthened signi cantly in
the aftermath of a decisive parliamentary
election result.The strong pound moved
returns frommost non-UK investments
into negative territory during the quarter.
Two matters will command the attention of
investors over the coming weeks. One is the
Greek negotiations, which may result in the
departure of Greece from the eurozone.The
other is the looming decision of the Fed on
raising interest rates in response to a strong
US economy. Either or both of these matters
could cause signi cant volatility in the capital
markets.We are satis ed with the quality
of our portfolio and feel that its defensive
characteristics of low nancial leverage and
resilient free cash ows will serve us well in
all market environments.
BURGUNDY
Joint manager: Worldwide Managed
and Worldwide Opportunities
China the exception as stock markets
mark time in second quarter
China’s equitymarkets
have boomed since
last October
S
entiment can be characterised by the
phrase‘risk-o ’ across most equity
markets as bond markets aggressively sold
o and events in Greece could no longer
be ignored by investors. Recent economic
data has improved following seasonal
weakness, while wage growth and a waning
impact from energy prices helped boost
in ation expectations. Stock selection within
nancials and industrials contributed to
performance, while a number of holdings
responded positively to the Conservative
election victory. Gains from 3i Group were
driven by asset disposals above (and ahead of)
expectation, while kitchen supplier Howden
Joinery Group rose against a still-challenging
consumer backdrop for large-scale purchases.
Stocks in cruise liner Carnival fell, largely
down to the price of oil rising, which we took
as an opportunity to increase our stake. Our
pair of UK banks proved the most pro table,
while the publishing pair modestly detracted.
A re-pricing of interest rate expectations
has been fuelling the volatility seen across
bond markets and this has subsequently
impacted equity markets. Despite a generally
improving economic climate, uncertainty is
forcing investors to reassess how they value
risk assets.We believe the current nancial
backdrop could once again be the norm
rather than the exception, which should be
supportive of a strategy where stocks rather
than the market determine performance.
BLACKROCK
UK Absolute Return
Gains for both the 3i Group and
Howden Joinery Group
Our pair of UKbanks
proved themost
pro table
Nigel Ridge
Richard Rooney
