For professional investors and advisers only
Schroder ISF∗ EURO Equity
Fund Update
Covering May 2016
Overview
Eurozone equities delivered positive returns in May, supported by a weaker euro. Economic data remained largely encouraging
with the composite purchasing managers’ index at 52.9 while the German IFO business climate survey beat expectations. The
information technology sector was the best performer while energy lagged. The fund outperformed the index, supported by
positive stock selection in several sectors.
The market and the drivers of fund performance
Merger & acquisition activity was behind some of the main individual contributions to relative returns. Not owning pharmaceutical
and agro-chemicals giant Bayer proved positive for fund performance as the German group launched a bid for US firm Monsanto.
Meanwhile, robotics group KUKA received an approach from its Chinese shareholder Midea. KUKA’s share price has trebled in
value since we bought it in 2014 so we took the opportunity to sell our holding and bank gains. Deutsche Boerse also supported
fund returns as greater clarity emerged over its bid for London Stock Exchange. The deal still needs to clear several hurdles but
Intercontinental Exchange has ruled out a counterbid. Should the tie-up take place, the potential synergies would be very
significant so the share price is sensitive to news suggesting the deal has a greater possibility of going ahead.
Elsewhere, bearings manufacturer Schaeffler gained, supported by expectations that it would be included in Germany’s main
stockmarket indices. The group listed in October 2015 and the founding family recently sold another portion of their holding.
Similarly, packaging firm Smurfit Kappa was expected to be included in the FTSE 250, having recently moved its main listing to
London from Dublin.
Technology stocks had been among the laggards in April but this reversed in May with both ASML and SAP being among the
leading contributors. For ASML this was due to the market’s greater conviction over the prospects for EUV (extreme ultraviolet)
technology, with reports in the Korean press indicating Samsung’s interest in ordering commercial volumes. Meanwhile, SAP held
its annual Sapphire user conference which saw positive client reaction to the group’s enterprise resource planning (ERP)
software and the S/4 HANA business suite. Apple is developing apps that will run on HANA software.
On the negative side, insurer Aegon was the largest individual detractor from relative returns as some questions emerged over
solvency levels. Volatility within Dutch credit markets has affected solvency although it remains within the targeted range. Swatch
was another detractor as the trading environment continues to be difficult for luxury goods firms. Swatch is the cheapest stock in
its peer group and it has net cash on the balance sheet. FinecoBank was another detractor. The Italian banking sector in general
came under pressure and Fineco was further impacted by concerns that parent company UniCredit may need to raise capital,
which could potentially see it sell part of its holding in Fineco.
The market outlook and portfolio strategy
We have built a position in German chemicals firm BASF, which has undertaken significant capital expenditure in recent years.
This has now peaked and BASF should start to reap the benefit of the investments it has made. The shares are very cheaply
valued, having been pressured by weak emerging markets growth, competition, and lower oil prices. These factors have seen
profit margins sink to a cyclical trough but there is scope for normalisation towards mid-cycle levels.
Another new holding is wind turbine manufacturer Nordex, a group historically focused on Germany but which last year bought
Acciona Windpower, gaining exposure to the US and emerging markets as well. There had been some concerns over Germany’s
plans to cap new wind power installations but the announced cap should be high enough to allow for ongoing growth in the
industry. Additionally, US production tax credits for wind power have been extended. To gain the full benefit of the tax credit,
turbines need to be ordered this year which should revive growth in the US market. Furthermore, Nordex has some of the lowest
margins in the industry and we see scope for restructuring to bring these towards best-in-class levels.
We initiated a position in Philips Lighting which was spun out from parent company Philips on attractive valuation multiples. The
group is a market leader in both traditional lighting and LED. Sales could be flat in the near-term as the traditional lighting
business winds down while LED ramps up. We see some restructuring potential – notably in the US business.
Aside from the sale of KUKA, we also sold out of the position in tyre maker Continental, which is a stock that has performed well
for us. We continue to have exposure to auto parts & suppliers via Autoliv, which has greater exposure to the active safety
theme. We also sold out of Remy Cointreau which now looks expensive following good performance on the back of restocking in
China and strong cognac demand in the US. Another sale was Nordea, which we exited after receiving the latest dividend;
regulatory constraints could limit future dividend growth.
The eurozone economy continues to tick along with GDP growth at reasonable, if unspectacular, levels. Recent purchasing
managers’ indices have been fairly solid. Spain continues to fare well despite the prospect of fresh elections in June. The latest
German business surveys have indicated that orderbooks for industrial companies are solid. On the downside, we have seen
∗
Schroder International Selection Fund
Monthly Fund Update: Schroder ISF EURO Equity
For professional investors and advisers only
weak earnings for the banking sector while the possibility of Brexit could be a source of volatility with the referendum drawing
near. However, the underlying picture for the eurozone remains encouraging, in our view, particularly relative to other regions.
We continue to look for selective value opportunities as well as focusing on stocks with restructuring, ‘self-help’ stories that can
drive improved operating and share price performance.
Important Information: This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International
Selection Fund (the “Company”). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares.
Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document and prospectus, together with the
latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder
Investment Management (Luxembourg) S.A. An investment in the Company entails risks, which are fully described in the prospectus. Past performance is
not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the
amount originally invested. Schroders has expressed its own views and opinions in this document and these may change. This document is issued by
Schroder Investment Management Ltd., 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your
security, communications may be taped or monitored. Risk Considerations: The capital is not guaranteed. The fund will not hedge its market risk in a
down cycle. The value of the fund will move similarly to the markets.