The Echiquier Agenor SRI Mid Cap Europe fund managed to limit its losses year-to-date to only -0.47%, even as its net asset value had risen by 34% in 2019. The secret? A strong focus on ‘structural winners’ and strict valuation discipline, resulting in an exceptionally high cash position at the start of the coronavirus crisis.
‘We invest in a limited number of ambitious growth companies, which we select on the basis of a structured process. What makes the fund unique is its combination of audacity and prudence,’ says co-manager Stéphanie Bobtcheff (pictured). ‘Even with €1.5 billion under management, our ambition for Echiquier Agenor SRI Mid Cap Europe has not changed: as one of the very first European funds, we will invest in European growth stocks with a medium market capitalisation and yield combined with ESG criteria and limited volatility.’
Four pillars
The fund’s solid relative return since the beginning of this year rests on four pillars, Bobtcheff explains:
- A strong positioning in companies with predictable growth, which can maintain their high profitability over the long term. Such ‘structural winners’ make up almost 80% of the portfolio.
- A successful stock selection: ‘With stocks that have weathered the crisis well and no positions in the worst-affected sectors.’
- Strong focus on improving the fund’s liquidity: ‘In 2019, we increased the maximum capitalisation of our investment universe to €10 billion.’ A decision that has been bearing fruit: ‘Today we see that the most liquid stocks indeed held up better during the correction.’
- A strict valuation discipline: ‘Given the market rally of 2019 and the high valuations at the time, the fund was only 82% invested at the beginning of this year. We used part of our cash position to increase a number of attractive positions during the market correction.’
In vitro diagnostics
The fund has been investing for years in in vitro diagnostics - currently accounting for almost 10% of the portfolio - with positions in Diasorin, Boomerieux and Tecan. ‘We believe that this sector has attractive fundamentals: 5% growth per year, a high share of recurring activities and high profitability,’ says Bobtcheff. ‘Biomerieux excels with its strong growth of its molecular diagnostics activities, Diasorin with its strong profitability, i.e. an operating margin of 30 %, and Tecan with its ability to assist the major players in the sector in the development of their platforms.’
Covid-19 has the potential to give these companies another boost, she believes. ‘The growth of these three companies could increase significantly in 2020, driven by the need for Covid-19 tests. The crisis has shown that in vitro diagnosis plays a crucial role in fighting it and that most medical decisions are based on it, while less than 5% of healthcare spending is focused on in vitro diagnostics. While we remain strongly convinced of the potential of this sector, we have somewhat reduced our positions though, following the strong price increases this year.’
ESG
It has now been more than five years since the investment team shifted the fund’s focus to growth stocks and implemented a structured investment process. This strategy has borne fruit: over the last five years, returns have been +54%, compared to +10% for the index, with lower volatility.
But the management team plans to continue to make improvements, for example on ESG. ‘The SRI label we received from the French government at the end of 2019 fits in with that development. We are convinced that we can create value by taking ESG criteria into account in our management: it improves our knowledge of companies and the selectivity of our stock selection, two factors that we believe are essential to beat the market in demanding conditions.’