Hermes Europe ex UK Equity manager explains the shares he has been buying, holding and selling in recent months.
'First of all, our strategy is high conviction,’ says Tim Crockford, lead manager of the Hermes Europe ex UK Equity fund. ‘We look to take high-conviction positions in companies where we see an element of change,’ he says. ‘That means every name in the portfolio will be a high-conviction name.’
With 36 holdings fairly equally weighted, the fund doesn’t have the ‘traditional “these are my top five” shares’, he says. ‘Risk is spread very evenly.’
The fund’s goal is to achieve long-term capital growth by investing in a diversified portfolio of European-listed shares, including Russia and Turkey. Germany is the biggest country weighting, accounting for a third of assets.
Crockford has been with the Hermes equity team for most of his career. He first joined Hermes Europe ex UK Equity in 2014 as a co-manager, assuming the position of lead manager in 2015. In the three years since then, the fund has provided a cumulative return of 46.4 per cent, compared to 11 per cent for the sector, placing it third out of 80 in its sector.
Orsted (CPH: ORSTED)
Hermes Europe ex UK Equity’s most recent addition this year is a Danish energy company called Orsted. Like other fi rms in the sector, it has recently gone through a rebranding, changing its name from Dong Energy (short for Danish Oil and Natural Gas) to Orsted to better reflect its transition from oil and gas to renewable energy generation.
‘Most off-shore wind farms in the UK are currently run by Orsted,’ he continues. The company is ‘a leader in terms of know-how in constructing off shore projects,’ allowing it to make profits where other fi rms in the sector struggle. When it comes to creating off shore wind farms, capital costs are very substantial As a result, return on investment is highly sensitive to the initial capital outlay, Crockford says. Orsted, however, is at the ‘lowest-cost end of being able to erect these projects’.
The company is a buy for Crockford because ‘the market is a bit more negative than we are on power pricing,’ he says. ‘Some of the projects in the pipeline are for well into the 2020s and will yield significantly higher power price agreements than the market is expecting.’
Crockford bought shares in January at DKK349 (£40).
Sartorius (EPA: DIM)
This share has been a long-term holding of the fund. ‘A high conviction call,’ says Crockford. The company – a German-listed manufacturer of capital equipment required for the production of biological drugs – has been in the portfolio since June 2014.
Since then, it has returned more than three times the initial investment. However, rather than seeing this as a decent return and taking profits, Crockford believes the stock is still ‘going to do more.’
Being a manufacturer of the capital equipment required to produce drugs, Sartorius is in a market that looks set to continue on its longterm upward trajectory. In particular, he says, it is ‘an industry leader in what is called single-use products’, locking customers into repeat orders.
The share is a hold now simply because the fund already owns it. ‘I’d buy if I didn’t own it,’ says Crockford.
In early April the share price stood at €75; Crockford bought at €22.25.
MTU Aero (ETR: MTX)
This German business ‘is still a company I’m positive on in terms of returns,’ Crockford says. However, he sold due to market valuations catching up with those of the fund. ‘We have very strict thresholds on our return expectations. We sold this name because we no longer expect it to deliver in terms of our minimum returns criteria,’ he says.
The Hermes team bought and sold to coincide with a typical timeline in the firm’s business. The firm supplies compressors to engine manufacturers, including parts that go in engines by Rolls-Royce and are sold to companies such as Boeing. ‘We bought back in 2014,’ says Crockford. At the time, it was an attractive buy because of where it was in its product cycle. When the firm is at the start of producing a new engine, ‘cash flow is very negative’, due to production and tooling, he says. The new engines and parts also ‘typically sell at competitive prices at the beginning,’ depressing the fi rm’s revenue at first.
Over time, however, ‘as it scales up production, it becomes more profitable.’ When the team purchased, because this was at the early stage of production of a new product, the cashflow profile of the company – and therefore its valuation – was low. This prompted them to buy. ‘We saw a company where in the next few years there was going to be a doubling of production and eventually positive free cash flows,’ Crockford says.
And they were correct: between buying and selling, the fi rm’s share price almost doubled. While he still believes the firm is a great company, once ‘the market had caught up’ it was time to sell.
The fund bought the stock in December 2014 at €70.00 (£61), and sold in February 2018 at €133.70 (£115).
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