LO FUNDS – EUROZONE SMALL & MID CAPS
Performance Comment
The Fund came down 5.56% (LOF Eurozone P RA) this month, underperforming its benchmark by 1.03%.Market Review
Markets have now been performing poorly for almost four months. In July, companies across the board made profit warnings, citing various reasons ranging from higher input prices to a weakening in consumer demand across several countries, in particular China. We have spotted 25 company warnings over the past month. Most are linked to a fragile consumer environment, are topline related (rather than margin related) and stem to a great degree from sector-wide issues rather than company specifics. Three sectors stand out: capital goods, food/general retail, and IT hardware (BNP).From Louis Capital we noted that Portugal’s GDP will fall in 2011 and 2012 due to imposed austerity measures, and that the Irish debt will be manageable as long as a solution to the crisis is found in order to reduce interest rates. Meanwhile, the US smells more and more like Greece and has been downgraded by two out of three rating agencies, and consumer sentiment (Michigan) in July was below expectations (63.8 vs. 72.5).
On the positive side, stress tests on 90 banks helped reduce the fears of a meltdown but did not provide the impetus to take the markets back into bullishness.
Portfolio Activity
At the end of the month, assets under management (AUM) amounted to EUR 297mn. The fund held 74 positions and cash amounted to 5.3% of AUM.
During the month, we initiated positions in Lanxess in Germany and sold Ansaldo in Italy and Praktiker in Germany.
Outlook
Certainly the picture could be better with sovereign debt issues (including the US) making newspaper headlines, deceleration of economic indicators (high comparisons basis as business picked up in the 2nd quarter 2010), and subdued 2nd quarter results.
We would nevertheless keep our positive stance towards small and mid cap exposure: equities are cheap in our view, earnings are growing, and several of the macro concerns are being addressed – obviously with diffi culty. In addition, cash levels are high and most of the Fund’s portfolios show a lack of conviction and an “indexed” stance, according to JPMorgan. We therefore consider current price levels as attractive in the mid- to long-term view.
