Update on Echiquier Agenor SRI Mid Cap Europe
After a solid 2021, the performance of growth stock funds was sorely tested in the first half of 2022 amid high inflation and widespread, rapid increases in interest rates.
Echiquier Agenor SRI Mid Cap Europe’s performance was volatile over the half-year. Initially, the fund suffered a massive derating¹ of growth stocks. Its positioning on reasonably valued quality stocks was more favourable later on in the period.
Record inflation spurred a strong response from the central banks, which adopted a tight monetary policy to cool off an overheating economy. Interest rate movements over the first half of the year were unprecedented. In the space of five months, yields rose from 0% to nearly 2% in Europe, and the from 1.5% to more than 3% in the case of the US 10-year.
This has had major repercussions on the global equity markets: high-multiple growth stocks have declined significantly due to compression of their valuation multiples, with no impact on their fundamentals. On the other hand, the more cyclical, low-value sectors posted excellent performance in relative terms.
In this very low-visibility environment, we believe it is critical to focus on the securities’ fundamentals. We are confident that over the long term, earnings growth is the key performance factor. And this is precisely what’s reflected in the very strong correlation between the annualised performance of Echiquier Agenor SRI Mid Cap Europe since 2013 and the trend in EBITDA of the companies that make up the fund over the same period (+11% per year)².
Visibility on portfolio earnings is solid. First-half results were very reassuring, featuring many welcome surprises like Edenred and Scout 24 which both raised their annual guidance, and very few disappointments. The fund’s median valuation returned to the lower limit of its seven-year average at 13.7 times EBITDA. This is an extra support factor for performance and downside protection in the current environment.
At the end of August, the Jackson Hole keynote speech focused once again on the issues of sustained inflation and maintaining very restrictive monetary policies, amid heightened fears of a recession.
During the six-month period we continued to build up the fund’s quantitative bias, reweighting securities with solid fundamentals (Worldline), and upped its defensive bias (Tele2, Shurgard). We reduced the fund’s cyclical/inflation-sensitive component, which now makes up less than 10% of the fund, and unloaded some high-multiple stocks (Vitrolife, Carl Zeiss) in order to raise the liquidity level in the portfolio (12% at end August).
With high inflation and a looming macroeconomic slowdown, the situation should be more promising for growth strategies with reasonable valuations.
In our view, your fund should perform well in an uncertain economic environment, thanks to proven investment methods, a positioning on the highest-quality stocks in our universe, and a risk profile that’s among the most prudent in its category.
²Current benchmark: MSCI EUROPE MID CAP NET RETURN EUR Fund’s July 2022 annualised performance: 1-year – 12.2% vs. 8.8% for the benchmark; 3-year – 3.6% vs. 8.0% for the benchmark; 5-year – 6.0% vs. 5.5% for the benchmark; 10-year – 10.3% vs. 11.0% for the benchmark; since inception – 8.3% vs. 7.9% for the benchmark.
The Fund is exposed to the risk of capital loss, equity risk, small and mid-cap investment risk and discretionary management risk.
The stocks referred to are given by way of example. Neither their presence in the portfolio nor their performance are guaranteed.
For more information on the characteristics, risks, and costs of these funds, and before making any investment, we invite you to read the regulatory documents available on our website at www.lfde.com.
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