Investing with Intention

Outlook

“Well, certainly, in 10 years many things will evolve... But I would always encourage people, when they think about 10 years, to ask the question, what won't change?” That Jeff Bezos uttered these words seems almost oxymoronic. Today, with speculation rife about the return on investment from the giant “prisoner’s dilemma” that is the hyperscalers’ AI capex binge and much analysis ultimately resembling futurology, we find ourselves even more focused than usual on things we expect to remain the same.

The existence of business cycles is one. Global industrial companies’ Q3 results have generally disappointed analysts and investors. Industrials specialists Oxcap Analytics highlight that 56% of their coverage have missed expectations while 36% have lowered guidance. The misses-to-beats ratio is historically high at ~3.0x, while the number of companies lowering guidance has exceeded those raising by ~1.9x.[1] Our portfolio has not been immune. In treating the misses ~6x more harshly than rewarding the beats, the market’s reaction appears short-sighted given we have already experienced the longest period on record with the ISM Manufacturing in contractionary territory (below 50). With new orders-to-inventories starting to pick up, it makes sense to own some companies exposed to “what won’t change” – a negative manufacturing cycle will eventually make way for a positive one.

Another constant is the importance of the price paid in determining an investor’s long-term return. The value credentials of the Global Alpha portfolio flash particularly brightly today. ~60% of our holdings (by number) have an earnings multiple below 12.5x. Several of our portfolio companies also intend to return 10-20% of their current market cap to shareholders over the next one to two years.

As we write, all eyes are on the US presidential election. It is unclear who will win or whether the result will be contested, but whoever ends up in the White House, we expect the United States’s position as the pre-eminent global economy is unlikely to change much over the next decade.

The portfolio should offer attractive diversification benefits alongside the alpha opportunity we are pursuing. It contains a breadth of end markets, earnings drivers, and stock specific catalysts which help offer investors a well-balanced, attractively valued fund compared to highly concentrated, momentum-driven benchmark indices.

Strategy Update

Performance

The Fund was flat in October. In comparison, the MSCI ACWI index returned +2.0% and the MSCI ACWI Value +1.7% (all in GBP).[2]

Danieli (-13% in GBP) continued its fall following full year results last month. Weak steel prices and high energy costs in Italy have impacted its Steel Making division’s profitability. This is less relevant to the broader investment case than the long-term growth we expect to be delivered by the Plant Making division, which is providing the equipment to help decarbonise steel production. Mondi (-12%) agreed to acquire Schumacher Packaging’s western European assets for €634m. This is roughly the cost of building the capacity from scratch, and the deal has strategic merit by providing Mondi with scale and integration benefits within its existing network. If utilisation at Schumacher’s recently expanded plants increases from today’s ~50% level, Mondi’s return on the investment will be attractive. This news was subsequently overshadowed by a weaker Q3 trading update than expected. Owning no NVIDIA shares cost -0.5% in relative performance.

Fiserv (+15%) was the strongest contributor. Its Q3 results provided further evidence to support our investment case. Organic revenue growth was +15% supporting better than expected margin improvement, and free cash flow significantly improved in line with guidance. Another large position, Baker Hughes (+10%), also delivered positive results. Sell-side analysts and investors are starting to place a premium on the long-term visibility that its Gas Technology business (which provides compressors primarily for the LNG industry) provides. We expect its high margin services revenues within this division to growth at a high single-digit compound rate for the next decade at least. This is a clear differentiator to other Energy Services businesses more at the whim of industry activity.

Activity

We bought two new holdings and sold two existing holdings in October.

Azelis is a global specialty chemicals distributor, listed in Belgium. We know the industry well from a prior investment in its peer, IMCD, and are attracted to the strong quality characteristics. These are linked to technical capabilities, an attractive customer proposition via a role as outsourced R&D, and significant network effects. There is a good long-term structural growth opportunity, with the top four players having just 10% of the global market, which can be accessed both organically and via consistent bolt-on acquisitions. In the near-term, we expect this opportunity to be supplemented by a cyclical pick up in volumes. Valued on ~16x cyclically depressed earnings, the shares offer attractive risk-reward. IMCD trades on ~25x with no discernible quality advantage, suggesting we may enjoy a re-rating to enhance our returns alongside the double-digit compound earnings growth we expect.

SS&C Technologies is the world’s largest hedge fund and private equity administrator, as well as the largest mutual fund transfer agency. It is a trusted software and solutions provider in a complex industry where customers are unlikely to switch once SS&C’s products are embedded in processes. Retention rates in its financial services offerings are 96-97%. Its strong competitive positioning has allowed it to consistently earn a high margin and return on capital, supporting attractive cash generation, but investors have been sceptical about its ability to grow. Acquisitions and R&D investment over the past several years are now driving faster organic growth. Recurring revenues are currently growing over 7% and management guided to +4-8% annual organic revenue growth over 2025-27 at its Analyst Day in September. SS&C’s shares are valued on just 12.5x earnings compared to the long-term average ~15x, offering attractive upside should it deliver to management’s expectations.

These new holdings replaced Talgo and Cemex. In both instances, we had reduced the position size at materially higher share prices, but based on new information our previous investment cases appear over-optimistic or wrong.

 

[1] Oxcap Analytics, ‘The Cycle: Earnings Learnings’, 1 November 2024.

[2] Fund: B share class (GBP), midday to midday pricing. Benchmark: close-of-business to close-of-business pricing.

 

KEY RISKS

The value of investments and any income generated may go down as well as up in response to general market conditions and the performance of the assets held, and is not guaranteed. An investor may not get back the amount originally invested.

Past performance is not a reliable guide to future results.

Changes in exchange rates may have an adverse effect on the value, price or income of investments.

There is no guarantee that the Fund will meet its stated objectives.

The movements of exchange rates may lead to further changes in the value of investments and the income from them.

There is a risk that any company providing services such as safe keeping of assets or acting as counterparty to derivatives may become insolvent, which may cause losses to the Fund.

 

For professional investors only.

Capital at risk.

 

For more information about the fund and how the fund is positioned, please visit our fund centre below: