Dislocation of Europe’s energy supplies, inflation, increased interest rates, Covid lockdowns in China… The list of factors creating headwinds for investors is long. A pair of French boutique-fund managers visiting Luxembourg explained that these problems however do not require strategies to be fundamentally rethought.
“Innovation is more important than the economic effect of the war in Ukraine, rising interest rates and inflation,” said Carl Auffret, fund manager at Paris-based DNCA Investments, which has 28 billion euro under management. “R&D is productive and will drive growth over the long term,” he added.
“We haven’t made big changes, just adjustments on the margins,” said Adrien Bommelaer (photo), portfolio manager at La Financière de l’Echiquier, an investment firm managing some 12 billion euro. “We remain focused on long term assessments of value, quality and ESG, coupled with a strategy of supporting sector leading firms. None of this hasn’t changed in the current environment,” he explained.
Investing in growth stocks in the context of rising interest rates was the theme of a Luxembourg lunch that the Paris-based firms hosted on Wednesday as part of a joint roadshow.
‘Higher rates are poison for valuations’
With interest rates rising, portfolios have been rebalanced rather than rethought. “This investment cycle will be different. There will be less exposure to growth businesses, with more emphasis on those with greater room for manoeuvre thanks to high margins which will enable them to generate cash flow and income, and thus value,” Bommelaer said.
“The focus will be on quality,” he said, citing the companies such as L’Oreal and AstraZeneca as offering this long term perspective. “In our portfolios, there have been reductions in the growth and ultra-growth pockets, such as potentially disruptive firms working online,” he said.
“I have to admit I don’t know,” Auffret responded when asked about how he sees the markets developing over the coming period. “I am reluctant to change allocations on the basis of interest rates potentially changing because that implies that I have a vision on their future trajectory,” he said, adding that “higher rates are a poison for valuations.”
Slight change in the rules
Nevertheless, the new, less liberal environment changes certain calculations. “The events in Ukraine have led to the coming to prominence of themes around energy provision, for example. Questions of energy sovereignty are now added to questions about the environmental impact and cost,” he said. Hence his funds have increased exposure to the likes of Air Liquide which is working on green hydrogen, and they have moved more towards manufacturers of heat pumps. He also noted increased concerns about food security, which will have positive implications for certain agri-businesses.
“There are also sectors which are largely unconcerned about increased costs, such as pharma,” Auffret noted. He highlighted the emergence of an effective obesity drug which could be a game changer for the health of millions of people. He also pointed to the firm Edenred which supplies meal vouchers and other retail tokens. “This company benefits from inflation,” he said.
Affert said that exposure had been lightened on hearing technology firm Amplifon, due to a perception of over valuation, and on Sika AG, a Swiss multinational specialty chemical company which faces risks from rising raw material costs. Care home group Orpea was exited completely for both economic and ESG reasons, he said. He noted the need to keep an eye on firms that were winners during the height of the pandemic.
‘High multiples are not a sin’
Commenting further on his view of fundamentals, Auffret said: “High multiples are not a sin in and of themselves. Nor are low multiples an intrinsic good. Everything has to be justified.” He highlighted Adyen, a global online payments leader which had exceptionally strong growth and high margins as it captures market share. “In the first four months of this year – with the exception of businesses exposed to the Ukraine Russia conflict – fundamentals have changed little and there is no reason to withdraw trust,” he said.
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