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THE INVESTOR
THE INVESTOR CENTRE
All information correct as at 30 September 2015
W
orries about China contributed
to weak equity markets during the
past quarter. Burgundy’s portfolio was at,
while the European indices were down
approximately 4%.
The correction was short-lived and, in our
opinion, our DreamTeam companies have not
yet been o ered at attractive absolute
valuations. Regardless, the combination of
high-quality and sensible valuation in our
element of the fund demonstrated its worth
with one-year returns ahead of the broader
European market.
Henkel is one of our largest holdings. It’s
half a consumer goods company with strong
positions in laundry (Persil) and hair care
(Schwarzkopf), and half a globally dominant
industrial adhesives company. Henkel has
been a signi cant contributor to our
long-term returns, although it was one of our
weaker holdings this quarter.
Henkel’s ordinary shares (which we own),
trade at 16.5 times 2015 earnings estimates,
and Henkel has an unlevered balance sheet.
We nd this attractive relative to companies of
comparable quality.The ordinary shares are
14% cheaper than the preferred stock,
provide similar economic interest (i.e.
earnings per share is €0.02 lower, or 0.5%),
and have voting rights (while the preferreds
do not).Additionally, we think that the market
does not fully appreciate management’s ability
to add signi cant value through savvy capital
allocation decisions at opportune times when
prices are once again attractive.
BURGUNDY
Joint manager: Greater European
and Greater European Progressive
High-quality businesses provide
some protection against volatility
Quality stocks and
sensible valuations
prove value
Kenneth A. Broekaert
T
he third quarter of 2015 was volatile and
eventful.Warren Bu ett says that there
is never only one cockroach in the kitchen.
It turns out the global economic kitchen has
several infestations.
The heart of the problem is China.
Slowing growth, combined with a de ating
stock market bubble, seems to have
panicked the government into a wildly
interventionist stance, culminating in a
modest devaluation of the yuan in late
August. It is axiomatic that a country can
control its interest rates or peg its currency,
but not both. China may be close to
choosing between the two; either path will
lead to volatility worldwide.
The other big decision is the US Federal
Reserve’s decision on short-term interest
rates.While this is the most anticipated rate
increase in history, there is still substantial
uncertainty about the timing. Since this
volatility is occurring after a long bull run
for quality stocks, we performed generally
in line with underlying market averages.
Our companies’ combination of strong
balance sheets and strong free cash ows should
continue to deliver competitive returns.
BURGUNDY
Joint manager: Worldwide Managed
and Worldwide Opportunities
Firms with strong balance sheets and
cash flow will provide solid returns
Problems inChinawill
continue to a ect the
rest of theworld
W
hile policy divergence in the developed
world was keenly tracked at the turn
of the year, the People’s Bank of China has
since stolen the limelight and instigated
a broad-based risk-o period for equities.
Despite this, the direction of growth has
improved across the euro area and remains
on track in the US.Yet concerns exist that,
following the decline in oil, a slowdown in
China may herald secular stagnation.
The fund delivered credible, positive
absolute returns in Q3 against a di cult
period of downward market volatility.
Returns were driven by the short book with
particular success in consumer services shorts.
Yet the largest individual alpha contributions
were from the long side (of the same sector).
Betfair made gains, boosted by a potential
merger, while Carnival showed signs of
revenue and margin progression towards the
company’s historical norms.Our short
positioning across the food retail sector also
added alpha. Financials were the largest
negative contributor, with HSBC one of
the losers given credit concerns emanating
out of China.
We continue to move towards a more
normal nancial world, although
policymakers are likely to follow a cautious
path in raising interest rates.This change in
direction will result in further volatility
impacting equity markets. Given events, and
heavy equity market falls,more cautious
investors are positioning their portfolios with
a renewed emphasis on risk as well as return.
BLACKROCK
UK Absolute Return
Fund delivered positive absolute
returns in Q3 despite market volatility
Positive signs in theUS
andEurope the upside
toChinese falls
Nigel Ridge
Richard Rooney
