Focus: ECHIQUIER VALUE EURO
Value strategies have outperformed the general trend in eurozone equities since the start of the year. The rotation seen since November 2021 coincides with rising inflation figures and a shift in tone by central banks. In just a few months the issue of inflation, which was supposed to fade away, has risen to become the key talking point of the US Federal Reserve (Fed). If the yield curve continues to steepen it could prove a powerful driver of outperformance for our investment style.
TRANSACTIONS
Economic outlook
The Russia-Ukraine conflict argues for a prudent approach to stock picking. The Fund has a generally balanced position and its exposure to the region is minimal. The conflict has disrupted global logistics, resulting in rising input prices and reducing the eurozone’s economic growth prospects. Industrial companies, which are underweighted in your Fund, seem to us to be particularly hard hit and are trading at prices that do not yet reflect the likely deterioration in their earnings prospects. In contrast, the impact of the conflict on some cyclical sectors seems already to be priced in. The eurozone banking sector is trading at 60% of its capital at the time of the correction, close to the ratio seen during the great financial crisis. In the automotive sector, the Fund is invested in companies which the market is valuing at less than half their annual revenue. A historically low ratio that in many cases represents a good opportunity, provided you pick carefully.
Fundamentals
Our approach remains unchanged. We continue to seek out the best companies at the best price. In January, this led us to invest in the UK’s BAE Systems. In our view, the company enjoys several entry barriers over potential challengers, not least the need to recruit several thousand engineers, invest billions in R&D, build close relationships with all players in the market and accumulate historic know-how. There are also barriers to its customers leaving. Most are states and have multi-year contracts with their suppliers. In most cases, customers also advance substantial portions of the cash required for future spending. For these reasons, the defence sector has proved resilient over the last ten years. When we invested, the company was valued at 8% of free cash flow, a level we saw as attractive.
INVESTMENT STRATEGY
We pick companies from a universe of about 400 stocks, identified using quantitative and qualitative screens. Our quantitative analysis screens companies by profitability, growth outlook, debt and valuation ratios. We then select those that enjoy entry barriers and competitive advantages. These competitive defences – Warren Buffett’s famous “moat” – mean the company can remain profitable into the future and reduces the risk of falling into a Value Trap. Finally, our qualitative selection process also considers ESG criteria. Price will always be an important element in any financial return and we are therefore convinced that investing in Value is a rational and, at the moment, differentiating way to invest your capital.