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Piquemal Houghton Global Equities Rc PIQUEMAL HOUGHTON GLOBAL EQUITIES Quarterly Report RC EUR - LU2261172618 30/06/2021 A sub fund of PIQUEMAL HOUGHTON FUNDS (the “Fund”) Investment Objective of the SICAV The investment objective of the SICAV is to outperform the MSCI AC World over the long term by selecting quality companies listed across the globe and buy them at a price that reflects their intrinsic value. We are totally benchmark agnostic. We have a fundamental, bottom-up, highly concentrated, high conviction strategy. Cumulative Performance as of 30/06/2021 Discrete Performance (%) Last Month QTD YTD Since Inception Jan 2021 Feb 2021 March 2021 April 2021 PIQUEMAL HOUGHTON GLOBAL EQUITIES - RC EUR 0,64% 0,34% 0,96% 2,09% -1,53% -0,38% 2,56% -1,44% May 2021 June 2021 1,16% 0,64% Portfolio Comment for Q2 2021 The anticipated end of the pandemic, better growth prospects across the globe and massive fiscal stimulus sent global stock markets to new all-time highs in the first half of 2021. In this bullish environment, our portfolio’s performance has clearly been disappointing. This disappointment stemmed from three main reasons: • Firstly, while a lot of valuations were stretched, we remained disciplined and kept approximately a third of our portfolio in cash or near cash instruments. This explains a third of the underperformance. Today, we have 20% in cash, that we will progressively deploy on stock market moves, as we have already done so over the past few months. • Secondly, 28% of the fund is invested in China. This market has registered one of the worst performances globally so far this year (+4% YTD), as a result of China’s introduction of monetary tightening earlier than anyone else globally, rising geopolitical tensions, and the US imposing restrictions on Chinese companies’ ability to list publicly. Even worse, our companies underperformed the Chinese market. The best performing names were banks (e.g. China Merchant Bank is up +40% YTD), which we have never considered as candidates for investment as they do not offer the kind of visibility we look for, and names that remained in favor despite what we consider as too rich valuations that do not offer the margin of safety we look for (e.g. Li Ning is up +83% YTD despite trading at 68.5x NTM PE and Wuxi Biologics is up +43% with a NTM PE of 200x). Three Chinese names were among our worst performers in the first half of this year. Ping An, the life insurance leader, was down by 15.9%. This was despite a positive set of results in Q1, with new business sales expanding by 15.4%. The company now trades at 1.5x BV and 6.5x NTM Earnings, which is incredibly attractive for a 15% grower. Autohome, the leading auto website provider with 60% market share, lost 33.3%. In Q1, revenues were up 19.9% but profits were down 4% upon higher investments for the long term. We are still convinced of the company’s strong positioning given China’s expanding auto market and reinforced our exposure to Autohome, taking advantage of the fact that it now trades at 12.5x NTM PE and offers at least 10% earnings growth as well as a 10% FCF yield. Minth, the global leader in auto parts with 10% share worldwide and 30% share in China, was also under pressure (-5.5% YTD) despite the company guiding for 20% net income growth in 2021. The stock trades at 15.4x NTM and offers long term earnings growth of 14%. • Finally, we suffered from our underperformance in the US market; our names were flat while the market was up 18%. The momentum of the tech leaders, that we have no exposure to, was sustained: Microsoft +26% YTD, Facebook +31%, Alphabet +44%, Nvidia +58%. While these companies remain great quality franchises, we have doubts over their ability to justify their valuations given the difficulty they should have with growing at their current rates over the long-term in an environment where there is now so much money in tech that competition should become stiffer. In this environment, Merck was only up +2.9%, despite Keytruda’s leadership in oncology treatments, particularly for lung cancers, offering them double digit growth over the coming years, whilst only trading at 12x NTM. Nor has Cummins’ share price seen any significant appreciation so far this year, despite double digit growth expected over the coming years as truck manufacturers increasingly outsource their engine production to Cummins as they choose to increasingly focus their internal capex on the EV transition. The company trades at 14x NTM PE. We can’t prevent ourselves from stepping back and wondering about what happened over the first half of this year. Should we change our mind and reconsider our positioning? Despite the short term pain, we are deeply convinced that our disciplined approach makes sense as stewards of capital over the long term. History is full of bubbles, booms and busts, corporate collapses and crises which illuminate the present financial world. We can’t prevent ourselves from comparing what we’re going through today with what happened in the Nifty Fifty. As today, the 1960s were buoyant years for the stock market with an increasing number of investors in the US stock market. Seven times as many Americans held shares by the end of the 1960s than during the height of the 1929 bubble. Today, 41% of all US households’ financial assets are involved in equities, compared to 36% in March 2000 and 30% in December 1968. In the 60s, Wall Street was transformed by a huge influx of new personnel throughout the decade. By 1969, half of all salesmen and investment analysts had only come into the business since 1962. They only had experience of a prolonged bull market, a key factor in sustaining the Nifty Fifty bubble. This is not wildly different from today, when after a unique 13 year-long bull market, a lot of investors and analysts have only experienced one side of the market. The Nifty Fifty was a group of 50 stocks that all shared similar characteristics: high quality franchises that benefitted from surging economic growth and strong balance sheets. Delivering healthy profits and good returns for investors, they came to trade on very high valuations. The group included Revlon, Procter & Gamble, Philip Morris, Pepsi, Pfizer, Coca Cola, IBM, Disney, Eastman Kodak and Polaroid. Certain sectors were particularly well represented, including consumer staples, healthcare and technology. It was said by many investors at the time that Nifty Fifty stocks should be bought and never sold. By the early 70s, they had become the darling of many investors and staples of their portfolios, which saw their valuations move into the stratosphere: Johnson & Johnson (57.1x trailing PE), McDonald’s (71x), Disney (71.2x), Baxter Labs (71.4x), International Flavors & Fragrances (69x), Avon (61.2x). These valuations are not so different from the valuations offered today by Tesla (663.9x), LVMH (72.4x), Nvidia (82.2x), Amazon (65.5x), Netflix (56x), ASML (54.4x), Kweichow Moutai (54.4x) or Alphabet (40.5x). It was a long party for investors that eventually had to come to an end. Against a backdrop of rising interest rates, high oil prices, political instability over Watergate and the end of the Bretton Woods monetary system, US stocks entered a bear market in 1973. The Nifty Fifty stocks initially held up relatively well against the market but then came under severe selling pressure. From their highs, some of the share price declines to 1974 lows were precipitous: Xerox (-71%), Avon (-86%) and Polaroid (-91%). This episode revealed the vulnerability of highly rated companies to rising risk aversion. Research suggests that holding the highest valued stocks in the Nifty Fifty resulted in particularly poor performance over multiple decades following the early 1970s. This episode reminds us that de-ratings of highly valued companies can be savage, significant and swift. Even high quality businesses can be poor investments if they are bought at extended valuations or not sold as valuations become extended. We are bottom up fundamental stock pickers and strongly believe that discipline matters. We invest with an absolute return mindset. That is, we define risk as losing money for our clients, rather than in terms of deviation from any benchmark index. We invest in companies we consider to be high quality in terms of management, franchise and financial strength, and that are attractively valued. Today it means we are lagging behind sharply rising markets but going forward we are convinced it is the right approach to preserve capital and offer the best risk-adjusted return. As of today, we favor three categories of companies in our portfolio: • Global market consolidators that have benefitted from the current tough environment, as it has allowed them to massively automate and cut costs, enabling them to emerge as free cash flow generation machines. The companies that fit this bill include the resource companies Barrick Gold, Newmont, Rio Tinto and Total. They benefit from oligopolistic positions in markets where production can no longer expand due to stringent regulations and lack of available resources at a time when the move to more renewable energy generation generates more and more demand for these resources. These companies offer FCF yields in excess of 7.5%. • Global industrial leaders that are extremely well positioned to benefit from secular increases in demand for their respective products. This category encompasses companies such as Cummins, the global leader in truck engines and filtration systems, Michelin, the global leader in tyres, and Minth, the global leader in auto components.
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