In summary:
- Navigating the current challenging market conditions requires agility and discipline.
- Valuations are looking far more attractive, but H2 earnings will determine if potentially lower future earnings have been priced in.
- We have shifted the portfolio’s previously cautious position by reducing its exposure to the defensive insurance sector in favour of growth opportunities that are now more attractively priced.
We are currently at a very interesting market juncture. The decline of Swiss small and mid-cap equities has been steep this year – the SPI Extra Index has given back most of its previous outperformance over the large cap SMI Index – leaving valuations at far more attractive levels than they have been in recent years.
However, amid expectations that the world may be poised to fall into a recession, further volatility is anticipated in the coming months as H2 corporate results outline how far earnings may need to be rebased and how much of this has already been discounted into current valuations.
Navigating this storm will require agility and discipline as opportunities, such as growth at a more reasonable price and potential M&A activity as people seek to unlock value in underappreciated companies, are countered by uncertainties surrounding the secondary effects of the war in Ukraine, China’s zero Covid policy and hawkish central bank policy.
The portfolio’s performance has been in line with its benchmark so far this year, despite our highly active approach. Given the market’s significant derating, we feel valuations are now in an attractive enough position to take reposition the fund away from our previously cautious positioning, which was overweight defensive sectors such as insurance, in favour of redeploying cash into more attractive stocks, particularly in the growth area.
So far this year we have introduced five new stocks into the portfolio and increased our positioning in several names where we have high conviction and believe the price now represents a more compelling entry point. Key portfolio changes are highlighted:
- We have added to our existing position in leading dental implant company Straumann, which is benefitting from strong demand for its clear dental aligner business. The company has also invested a lot of money in development and new acquisitions to increase its exposure to this very high growth area. Straumann is now the portfolio’s third largest holding on an absolute basis.
- As active managers, we are also prepared to deviate from the benchmark when we have high conviction and one of our top relative positions is Temenos, a software company that focuses on the banking industry. The company is currently in the midst of structural change, shifting from a classical software subscription model to a more rental-orientated software as a service model. This shift has caused some short-term pain in the share price, but we feel the price is nearing a trough and have therefore added to our position at what we believe is a very attractive pricing point. We expect growth to be around 8-12% in the coming years and also believe Temenos could be an M&A target in the medium term.
- We have further expanded our exposure to specialist financials by adding to two existing portfolio positions in this space. Swissquote is a Swiss bank which is very involved in online trading and its strong IT platform participates in the trading of cryptocurrencies. The stock price has recently suffered from industry concerns about cryptocurrencies, creating an opportune moment to add to our holding at an attractive price. We also topped up our position in Leonteq, which specialises in structured financial products and insurance products. Our biggest holding in this sector is Cembra, which is now the portfolio’s third largest relative position. Cembra is a private loan company in the domestic Swiss market, but also offers its own credit card solution and we continue to see strong upside potential for this business.
- Another significant sectoral change has been to close the portfolio’s underweight to the semiconductor industry. Swiss companies have a very strong presence in this sector and while we have had exposure through Inficon, we have reduced this position in favour of bringing two new semiconductor stocks into the portfolio, Comet and VAT. These are component suppliers that benefit from having some very well known clients in the sector. Our semiconductor exposure is currently neutral, but our next step will be to raise that to overweight once there is more positive news flow coming from the sector as we see this as a very strong long-term growth story.
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