Tapping our canes in the fog

Outlook

“Human beings want to feel like they are on a power walk into the future, when in fact we are always just tapping our canes on the pavement in the fog.” Mark Lilla (Columbia professor)

Writing outlook sections can be challenging at the best of times. When the entire stock market is moving up and down by 10% based on a rapidly evolving, and incredibly complex, picture relating to global trade, it is best to hold one’s hands up and accept the limitations of building conviction around a particular outcome.

While the ongoing earnings season is providing some snippets of insight, thus far I don’t believe we have learnt much of lasting value. Real-time data, such as Shanghai to LA shipping volumes, point to a challenging period for economic growth ahead. But things seem able to turn on a dime currently, and we are unclear as to how much weight to place on 2025 earnings in the event of a tariff-driven recession. There are some parallels to 2020’s ‘manufactured’ recession relating to Covid lockdowns, or as one commentator put it, “The kind of stop/go dynamics look clearly similar as a policy shock nukes the cycle, while the “solution” is to roll back the shock gradually. A lockdown before a reopening essentially.”

Overall, I see little reason to believe that volatility (upwards or downwards) will dampen meaningfully in the near term. While these are ‘known unknowns’, we are as much as ever “tapping our canes on the pavement in the fog” and a balanced approach to risk continues to make sense in this context.

This balanced approach means that we are not merely ‘hiding out’ in defensive business models, but own select companies which are exposed to material near-term uncertainty, depressing valuations today but with credible (or ‘knowable’, as we put it in January) paths to this uncertainty alleviating over the longer term. Our new investment in 4imprint would certainly fit this, as would our Life Sciences related investments (Avantor, Certara, Waters).

The asymmetry of risk-reward within the portfolio drives our enthusiasm about the prospects of delivering attractive compound returns. We are excited to have had the opportunity to improve the quality and future return profile of the fund by taking advantage of price weakness to buy three new positions and add to some existing holdings.

Strategy Update

Activity

We bought three new holdings and exited two in April.

4imprint is the largest player in the US promotional products industry. With just 5% share in this very fragmented industry, there is still a long runway for potential growth via market share gains. Customers are predominantly smaller businesses ($1.0-2.5m sales), with none accounting for a significant share of revenues. 20 years of compounding sales, profits and the share price at a double-digit rate under an excellent management team had helped the shares re-rate to a high teens P/E multiple, but a combination of concerns about a recession and supply chain exposure to China saw the share price half from its peak to our entry price. Historically, 4imprint has emerged from economic downturns in a stronger position compared to entry as it continues to invest through the cycle due to its scale and strong balance sheet. Cyclical risks should not be dismissed, but the cash generation – it has limited working capital or capital expenditure requirements – helps derisk the investment case. The free cash flow yield in our bear case scenario is still ~7% and we received a ~10% yield through an ordinary and special dividend in early May.

Kingspan is a global leader in insulated panels focused predominantly on new build activity for commercial and industrial end markets in Europe. The group has a strong M&A track record which, combined with organic growth, has enabled sales to compound at 16.5% per annum over the last ~30 years[1]. Management have proven themselves as disciplined capital allocators and returns have gradually increased since the GFC, well above the cost of capital, highlighting the group’s status as a quality compounder (albeit with some end market cyclicality). Regulatory tailwinds and requirements for increased thermal efficiency in buildings should support growth in the core insulation business, while expansion into new product lines, including roofing and data centres, help underpin management’s target of 5-10% sales CAGR to 2030.[2] A prolonged period of weakness in European construction end markets and a tariff induced sell-off left the shares trading at decade low valuations (11x EV/EBITDA vs 10 year average 14.5x[3]), providing an attractive entry point. More recently, permitting data and results commentary from peers highlight that European construction markets may be turning upwards, increasing our conviction that we are close to the start of a multi-year recovery in Kingspan’s end markets. Kingspan was a direct replacement for our holding in Aalberts.

Lam Research is a leading equipment supplier into the semiconductor industry (‘semicap’). Lam is the global leader in etch but also has strong exposure to deposition since the acquisition of Novellus Systems in 2013. Since the acquisition, the semiconductor industry has at 3x the rate of global GDP growth. However, semicap revenues grew even faster with a CAGR 1.7x the broader semi industry, and within semicap, Lam increased its market share, resulting in growth 1.2x the industry rate[4] . Product innovation positions it well to enable the coming technology inflections in leading edge semis, across its historic position in memory (both NAND and DRAM) as well as in logic. As semiconductor architectures will continue to integrate more 3D features, these layers will be constructed with more precise deposition and etch equipment. Another key attraction is the growth of Lam’s customer support business group (CSBG) within the revenue mix. These recurring revenues, from selling spare parts, servicing equipment and upgrading tools in the installed base of ~96,000 chambers, now constitute ~40% of total sales and are expected to grow to 50% over time.[5] We bought the shares with a 7% FCF yield[6], trading roughly in line with its long-term average valuation multiples despite its higher quality business mix (more recurring revenues, less cyclicality via diluted exposure to NAND). Lam was a direct replacement for our holding in KLA Corporation.

Given the intra-month volatility, we were also more active than usual adding to and reducing existing holdings. We added to investments in Howden Joinery, Allegion, Weir, and Resonac. We reduced the weighting in Clarkson, Azelis, Intercontinental Exchange, McKesson, and our banks.

Performance

The Fund returned -4.2% in April. In comparison, the MSCI ACWI index returned -2.5% and the MSCI ACWI Value -4.4% (all in GBP).[7] 

Certara (+35% in GBP) was the largest positive contributor. The shares rose materially following the FDA’s announced plans to gradually reduce animal testing in favour of new approach methodologies (NAMs) including in computational modelling and AI/Machine Learning, both of which are areas of strength and ongoing investment for Certara. Cosmos Pharmaceutical (+24%) delivered a large beat versus profit expectations. The share prices of companies exposed to domestic consumption in Japan, particularly those with defensive revenues like Cosmos, generally performed well. Howden Joinery (+9%) released a trading statement which showed improving sales momentum in its core UK division. Investor expectations for growth in the remainder of the year remain modest.

Baker Hughes (-22%) was the largest negative contributor. Against the backdrop of a very weak oil price and tariff related cost increases, guidance for the Oil Field Services & Equipment (OFSE) division was reduced. Avantor (-23%) lowered its organic revenue growth guidance due to challenges within the Academic & Government end market within its Laboratory Solutions segment, while maintaining its earnings guide. Alongside this, it announced that a change in CEO will take place this year. Fiserv (-19%) maintained its guidance for revenue and profits but missed growth expectations in Q1 within the closely watched Clover merchanting business.

 

[1] Bloomberg Finance LP. Data to 30 April 2025.

[2] Kingspan 2023 Capital Markets Day.

[3] Bloomberg Finance LP. Data to 30 April 2025.

[4] Lam Research 2025 Investor Day.

[5] Lam Research 2025 Investor Day.

[6] Bloomberg Finance LP. Data to 30 April 2025.

[7] Fund: B share class (GBP), midday to midday pricing. Benchmark: close-of-business to close-of-business pricing. All performance data from Bloomberg Finance LP.

 

 

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.

 

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