Over the first half of 2016 European Assets’ portfolio had, what the chairman describes as a “torrid” time. he says progress was made on the economic front but political risk ultimately dominated the market, especially after the British decision to exit the European Union. The NAV, in sterling total return terms, fell by -4.0% against a Euromoney Smaller European Companies (ex UK) Index return of +5.5%. The depreciation of Sterling against the Euro flatters these returns, with in Euro terms the NAV fell -14.8% against a benchmark return of -6.5%.
Within the portfolio, a number of companies were impacted by both economic uncertainty in the UK and the depreciation of Sterling against the Euro. Of particular note in this regard are the builders’ merchant, Grafton Group, the agronomist, Origin Enterprises, and the ferry and freight business, Irish Continental Group.
Taking each in turn, Grafton Group has substantial Sterling based earnings and is also exposed to the UK construction market, which appears to be heading for a more difficult time. While they are currently reviewing the stock, theye believe that the company is differentiated in its sector, both from a business model perspective in the UK, but also through its exposure to Ireland where trends remain good while the market should continue to benefit from the positive effect of consolidation.
For Origin Enterprises, Brexit compounded a difficult year in which weather conditions and low farmer incomes have put pressure on profits. With almost three quarters of the profits derived from the UK, the Sterling devaluation is unwelcome. Negotiations regarding Britain’s exit from the EU and probably the Common Agricultural Policy will also continue to provide uncertainty. However the strength of the company’s market position, potential outside the UK in Eastern Europe, and valuation maintain their belief in the investment over the long term.
Irish Continental Group, is of course exposed to any weakness in trade relations between Ireland and the UK. The shares have performed exceptionally well since they first bought them for the portfolio and while they had been reducing the position since the beginning of the year the recent share price weakness in response to Brexit has caused underperformance. They have spoken to the company and remain confident trade and leisure links between the UK and Ireland will endure. There are potential offsetting factors such as the reintroduction of duty free which historically was a strong contributor to profits.
The other principle area of weakness in the portfolio lies amongst their financials. They have held quite large positions in this sector for some time as they believed that it offered an attractive combination of quality and value. While they still believe this to be true in selected cases, they have sold a number of positions that have negatively impacted the portfolio following reviews. Of note are EFG, the Swiss private bank, which they sold after they undertook an ambitious acquisition that compromised their business model. They have also sold Permanent TSB, the Irish bank following the referendum as they believe the management of the UK buy to let mortgage book would continue to weigh on the company’s ability to improve its returns.
The other negative performer of note was Betsson the Swedish internet gambling business. The company issued a series of profit warnings relating to their Turkish activities. On review they have sold the shares.
Stock specifics have driven the positive contributors over the first six months of the year. Two relatively new holdings IMA, the Italian packaging machinery company, and IMCD, the Dutch speciality chemical distribution business, did particularly well rising +35.9% and +22.4% respectively. Other strong performance came from the Spanish free to air TV company Mediaset Espana, the Norwegian bank Sparebank, and Indutrade, the Swedish manufacturing and distribution group.
EAT : Torrid time for European Assets