Commentary

In the month of October, global indices pushed higher led by growth and technology shares. This is a familiar story much to the bane of value investors like us. For the year to date, the MSCI EAFE Growth index has outperformed the MSCI EAFE Value index by almost 10 per cent. The debacle around the pulled IPO of Wework and its implications for the valuation of the hundreds of the so called ‘Unicorns’ across the globe has done little to diminish investors’ appetite for growth stocks in the public markets. In fact, as stated in last month’s commentary, May and August of this year are two of the worst months for value investing since 1952. The other poor months for value were largely confined to the years of 1999 and 2000. Back then, as now, the whole proposition of value investing was being questioned. Investors now decry this period as the ‘TMT Bubble’ with the benefit of hindsight but they seem destined to continue to make the same mistakes. When the valuation of something like a Wework can go from $47 billion to as little as $8 billion in a matter of months, parallels with the collapse of the TMT mania are stark, and investors should be reminded that cheap capital may not last forever and that valuations should always matter in investment. The EAFE strategy had a relatively strong month in October.    

The largest positive contributors to performance were, in order of impact, BT (+15% total return in local currency), Exor (+12%), Nomura (+8%), Lloyds (+5%), Porsche (+11%) and Siemens (+5%).

Investors have shunned BT given the perceived risks around higher capex for fibre which would lead to a cut in the dividend and continued macro fears around the UK. The valuation remains very attractive on a price to earnings ratio of just eight times earnings for March 2021 and at five times operating cash flows. BT will invest more in fibre, as per the UK government’s wishes, if the payback from such investments is clear and attractive. In September, BT's CEO spent nearly £1 million buying shares at £1.71 per share. So far, he has spent nearly £6 million on BT shares (previous purchases were at £2.02 and £2.58 per share), prices not too dissimilar to ours. BT shares were amongst the worst performers for the year to date to the end of September, being down some 25% before the rebound in October. Today, BT shares are down 65% from their peak but we believe there is a significant recovery potential from here.

At the end of the month, Fiat Chrysler Automobiles (FCA) and the Peugeot auto group (PSA) announced their intention to merge, creating the world’s fourth largest automaker producing some 8.7 million cars a year. Exor, the controlling vehicle for the interests of the Agnelli family, is the largest shareholder in FCA, and this demonstrates further progress under John Elkann’s leadership. Elkann had long sought to reduce the Agnelli’s family reliance on Fiat which was seen by many a failing European automaker. Together with the late Sergio Marchionne, they have transformed the old Fiat group. Before his untimely death Marchionne had revitalised Fiat along with the acquired number three auto maker in the US, Chrysler. He then championed the idea of consolidation amongst the automakers. This deal marks the culmination of his work. Elkann has been appointed chairman of the combined auto group. The deal is clearly seen by the market as beneficial to FCA shareholders and therefore Exor, with the shares in both up strongly in the month.

The largest negative contributors to performance were, in order of impact, East Japan Railway (-4% total return in local currency), Eni (-3%), Sanofi (-3%), Japan Post Holdings (0%) and Korea Electric Power (-2%).

The portfolio has an attractive weighted average upside of 30 per cent and is on a price to earnings ratio of 14 times and a price to book ratio of less than one times.