Seeking to Identify Long-Term Winners

Considerable work is being done to identify companies that will emerge on the other side of the coronavirus-induced crisis. However, we are being patient because we believe market uncertainty may continue for some time.

�

Our focus remains on those small growth companies that can be much larger in five to 10 years' time, and so our structural overweights to sectors such as health care, IT, and the "new economy" tech-related areas within communication services and consumer discretionary will remain.

�

At the margin, we may add more cyclical stocks to the portfolio, particularly within the industrials space, as well as reinforce existing positions. We have also been leaning a bit more into the UK, given the removal of some Brexit-related uncertainty, extending our overweight position (although the underlying exposure to domestic revenues has only moved close to a benchmark position).

�

We continue to have high conviction in many names at the smaller end of our size range (i.e., below EUR 1 billion), and we will look for exciting new additions. But we believe it is appropriate to be less tolerant now of those smaller names where our conviction has waned. We still expect the portfolio to be at the smaller end than the benchmark but to a lesser degree than previously

• We invested in new names that increased our overweights in communication services and consumer discretionary.
• We deepened our underweight in industrials and business services.
• We adjusted our investments in financials.
• Our largest overweight exposures are to communication services, health care, and information technology.
• Our largest underweights were industrials and business services and real estate.

Communication Services

We further increased our overweight in communication services by adding Rightmove, the dominant UK online property/real estate portal, which sold off heavily after the market peaked in mid-February.

�

Our largest industry bet is entertainment, where we hold shares in four games developers, one of the fastest-growing segments of the industry. Our holdings include Codemasters Group Holdings, a UK-based video game developer and publisher; Team17, a company that is one of the longest-running independent video game developers; Frontier Developments, a world management games specialist; and Stillfront, a Sweden-based publisher of digital games.

�

We are also overweight interactive media and services, where we hold Russian internet company Mail.Ru, which offers a range of online communication products and entertainment services; Scout24 Holding, an online classified advertising company that operates mainly in Germany; and Karnov Group, a supplier of information solutions for professionals in the areas of legal, tax, and auditing in Scandinavia.

• Rightmove is a well-established, market-leading consumer brand with high barriers to entry. Its dominant market share, further expanded by the popularity of its app, creates strong network effects. This is further supported by high margins, 100% cash conversion, and a shareholder-friendly management. Revenues are subscription-led, giving Rightmove a strong recurring revenue base with good visibility. In our view, the high-single-digit growth rate of average revenue per advertiser is sustainable due to product innovation, and Rightmove growth could exceed expectations when we see a recovery in UK real estate transactions.

Consumer Discretionary

We raised our overweight allocation to the consumer discretionary sector, adding SSP, which operates branded catering and retail units at airports and railway stations around the world as a concessionaire.

�

We own a broad swath of companies, with our largest industry bets in internet and direct marketing; textiles, apparel, and luxury goods; leisure products; and hotels, restaurants, and leisure. In internet and direct marketing, we own shares in Takeaway.com, a leading online takeaway food delivery aggregator; Trainline, the UK's leading online rail and coach booking platform; and Hellofresh, a Germany-based online provider of meal kits.

�

Our textiles, apparel, and luxury goods holdings include UK lifestyle brand Joules, which designs clothes, accessories, and homeware, and Watches of Switzerland, a retailer of watches and jewelry in the UK. Our leisure product names include Mips, a maker of helmets for reducing rotational forces on the brain caused by impacts to the head, and Thule, a Sweden-based company that develops and manufactures sport, outdoor, and cargo products. In hotels, restaurants, and leisure, our largest position is Malta-based Kambi, which provides outsourced online sports betting services.

• We started an investment in SSP on share price weakness. The next few months will be incredibly tough for SSP. However, we believe the shares could double in value as this high-quality company is exposed to attractive structural growth (growth in travel), is positioned to expand into a large underpenetrated food offering in U.S. and Asia Pacific airports, and has a highly regarded management team.

Information Technology

We raised our exposure to information technology (IT), increasing our position in Barco, a Belgium-based company specializing in the design and development of professional visualization equipment and solutions. However, we reduced our position in Wirecard, an online payment processing provider, which may struggle in a recessionary environment.

�

IT is one of our largest absolute and relative positions, which is consistent with our growth approach. We continue to favor companies in software, semiconductors, and semiconductor equipment and IT services, with innovative and resilient business models that are supported by solid bases of recurring revenues or driven by structural trends.

�

Keywords Studios, a leading outsourcer of video and digital games, and Amadeus IT, a leading global distribution system provider, are our largest holdings in IT services. Within software, we hold WANdisco, a big data technology company and specialist in distributed computing, and First Derivatives, a provider of software and consulting services, particularly to finance, technology, and energy organizations. IQE, a leading global manufacturer of advanced semiconductor materials, and Aixtron, a leading Germany-based provider of deposition equipment to the compound semiconductor industry, are our largest investments in semiconductors.

Industrials and Business Services

We increased our underweight in industrials and business services, selling stocks that have not met expectations, such as Balco, a Sweden-based company that specializes in glazed balconies, and Inwido, a Sweden-based manufacturer of windows and doors. We also opened an investment in Trelleborg, a Sweden-based engineering company active in the polymer technology sector.

�

We are overweight professional services, building products, and industrial conglomerates. In the former, our largest position is Intertrust, an international trust and corporate management company, followed by Alpha Financial Markets, a leading global consultant to the asset and wealth management industry. In the latter, we own shares in DCC, an ex-venture capital company that provides international sales, marketing, and support services. The company offers diversified exposure to the UK/Irish economies and has an impressive long-term record of growing earnings and dividends. Our holdings in building products include Balco Group, which provides balcony solutions across Europe.

�

In the machinery industry, we own Weir Group, a global manufacturer of industrial pumps and fracking equipment; Va-Q-Tec, which designs and manufactures customized vacuum insulation panels; and Rotork, the world's leading designer and manufacturer of heavy-duty industrial valve actuators devices. We also hold Norma, a Germany-based maker of clamps, connectors, and fluid systems that we expect to benefit from the trend of engine downsizing and carbon dioxide emission control and from the stronger global focus on leakage control of gases and fluids.

Financials

We altered the mix of our financials holdings, selling Sabre Insurance�and moving to a zero-weight exposure to the industry.

�

We are also underweight in banks. In addition to the headwinds deleveraging, litigation issues, and increased regulation, they must now cope with a sharp recession and a more prolonged period of low interest rates that will further erode earnings. We hold Bawag, Austria's fourth-biggest bank; FinecoBank Banca Fineco, an Italian financial service company that specializes in online brokerage; and Van Lanschot Kempen, a Dutch diversified bank that is now increasing its focus on wealth and asset management.

�

We remain overweight the capital markets industry, focusing on the relatively higher-quality asset managers that are durable growth companies. Our largest holdings include Intermediate Capital, a UK-based specialist asset manager; XPS Pension Group, a UK-based holding company that�is engaged in the pensions actuarial, consulting, and administration business; and Draper Esprit, a Pan-European venture capital fund that invests in disruptive tech companies at the early stages of growth.

• We exited Sabre Insurance, raising funds for more interesting opportunities. The company passed a special dividend as it faces higher claims risk from COVID-19, the disease from the coronavirus, over time. The 2019 profit after tax missed expectations.
• We opened a new position in Funding Circle Holdings, an online platform that channels funds to small businesses. The company can make inroads into a traditional activity of banks, which, however, are more reluctant to lend to SMEs in a recession. Results for 2019 were encouraging, with solid growth in loans under management and revenues. The company guided for 15% growth in U.S. and UK revenue combined. Funding Circle said it enjoyed a good start to the year and that the coronavirus crisis was having little impact on its operations.