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Past performance is no indication of future returns.
January 2014 was a month of two halves for European Equities, and in particular Small Caps. The start of the new year marked a renewed sense of optimism within the region which translated into exuberant stock market returns as our benchmark rose +4.8% over the first 15 days. This is in direct contrast to the latter half of the month where the index declined by -4.4% as concerns around the sustainability of emerging market growth came to the forefront as companies reported disappointing results and large currency fluctuations began to take effect, bursting the bubble of enthusiasm leading to a sell off. Whilst in Euro terms absolute return was positive, due to the weakening of the Euro, the GBP NAV declined -0.5%, behind a benchmark return of 0.26%.
Our exposure to auto manufacturers’ suppliers was beneficial during the month. A number of our holdings such a Norma Group (+9.1%) and new position SHW (+9.9%) hold dominant market leading positions in the supply of components used by manufacturers to reduce weight and emissions whilst increasing fuel efficiency. These areas are increasingly becoming the focus of not only the large global OEMs but also governments as regulation becomes tougher.
January marked the start of the full year earnings reporting season which will continue to dominate share related newsflow in the current environment. Tod’s (-16.3%), the Italian luxury shoe manufacturer, reported sales that were significantly below expectations, linked not only to the emerging market slowdown in luxury demand but also due to continued issues within their Italian operations. We are undertaking a full review to ascertain if the longer term investment case remains on track.
Other detractors from performance included Dutch animal nutrition and fish feed producer Nutreco which fell -8.6% as a result of increasing concerns around overcapacity in the salmon feed market. While we acknowledge the concern there are other more positive tenets of the investment case, not least the attractive valuation. We have added to the position.
We made limited changes to the portfolio during the month, which we think is the best course of action during such a volatile period. We will continue to search for quality smaller companies, with strong management teams, and invest in them at attractive prices.
As at 31 January 2014
The value of shares and the income from them is not guaranteed and can fall as well as rise due to stock market movements. Past performance is not a guide to future performance. When you sell your shares, you might get back less than you originally invested. If markets fall, gearing can magnify the negative impact on performance. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. Emerging Markets, Unquoted Companies and Smaller companies carry a higher degree of risk and their value can be more sensitive to market movement; their shares may be less liquid and performance may be more volatile. The fund may invest in hedge funds or private equity funds which are not normally available to individual investors, exposing the fund to the performance, liquidity and valuation issues of these funds. Such funds typically have high minimum investment levels and may restrict or suspend redemptions or repayment to investors. The asset value of these shares and its prospects may be more difficult to assess.
* The Board has stated that barring unforeseen circumstances it will pay an annual dividend equivalent to 6% of the NAV. The dividend is funded from a combination of accumulate capital gains and income but the dividend may fluctuate. Dividend payments may constitute a return of capital in whole or in part and may be achieved by foregoing future capital growth.
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