With an increase of 25.80% (unit class V) in the first six months of 2019, the NESTOR Europe Fund achieved its best mid-year result in 10 years, while the benchmark index MSCI Europe rose 14.11%. This was more than enough to compensate for last year's disappointing performance. Thus, despite the changing environment of recent years, the high degree of diversification and flexibility of the fund have proven their worth. The same applies with regard to the regional focus and the investment in small, medium-sized and large companies. Another very successful fine-tuning measure was the addition of IT and tech stocks, which varied according to the valuation position of the market.
The V unit class launched in 2016 marked its 3rd year of existence on 1 July, with a performance of 35.91% (equivalent to 10.80% p.a.).
Avoiding potholes in the auto industry
When it comes to outperforming a benchmark in a portfolio, avoiding the big potholes is generally a key factor. In recent months, these have emerged more frequently in the automotive industry and among its suppliers. Traditionally, the NESTOR Europe Fund has hardly invested in this sector. For one thing, we do not believe we can reliably assess the cyclical nature of the industry. Furthermore, we avoid sectors with particularly high capital intensity and permanently high development costs. Although this approach can lead to a temporary underperformance in certain phases, in the long term we prefer stocks with a very high free cash flow. This characteristic can be readily found among the leading manufacturers of branded goods.
Adidas sprints away - with shoe soles made of marine debris
Notably, the sporting goods and leisure industries succeed in creating “iconic brands” in an exemplary manner. Manufacturers like Adidas are currently being inspired by the full force of parallel megatrends. These include the emergence of new middle classes in developing countries, the tendency towards youthful clothing among seniors or the triumph of sneakers in everyday life. Sneakers are also experiencing ever shorter intervals between models and a tendency towards higher prices with a comparatively lower durability. In this context, it is important that Adidas has also recognised the signs of the times when it comes to sustainability. For this reason, a significant corporate goal is a ban on brand-new plastics being used in production. For example, some soles are already made from marine debris. The Adidas supplier Aquafil, a further holding of the NESTOR Europe Fund, takes advantage of this trend. The Italians went public with the aim of establishing themselves as a company with a circular business model and produce high-quality yarns from 100% regenerated material (“Econyl”).
Amplifon and Tinexta meet expectations
Following a discussion with Gabrielle Galli (CFO) in Milan in September 2017, we identified Amplifon as a “value builder” and initially included the stock on the watch list. From October 2018 to March 2019, we successively acquired shares between 14.40 and 16.30 for the NESTOR Europe Fund. Amplifon is the world’s leading hearing aid retailer. We were particularly pleased with the latest major acquisition in Spain which further improved the overall picture. In contrast, we classified Tinexta as a growth stock with a glaring undervaluation. The company offers digital trust solutions, credit information, innovation and marketing services. With a performance of over 100%, Tinexta was one of the biggest performance drivers since the beginning of the year alongside Amplifon and Adidas.
Dividend stars, blue chips and Russian stocks pay off
High dividend payments also had a positive effect in the second quarter, with many stocks such as Allianz and Amundi quickly recovering their dividend discounts. Large-cap stocks such as Novartis and Nestlé performed particularly well in the May correction. The new market-leading Russian investments Novatek, X5-Retail, and Sberbank also made a positive contribution, although the overall weighting of approx. 1.6% is presently still quite modest. The Foro Medcap in Madrid in May also presented new ideas, although we had already acquired an initial position with Atresmedia.
Outlook
The changed situation on the interest rate front has put the valuation ratios for the stock markets in a different light. The intention of the two major central banks, the Fed and the ECB, to relax their lending policies led to a sharp slide in risk premiums in the high-yield sector. Therefore, combined with an overall robust economic situation, we are unable to detect any general overvaluation of the European stock markets. Moreover, the pipeline of promising investment candidates with attractive valuations – despite the market recovery – remains abundantly full.