Carmignac P. Grande Europe: Letter from the Fund Manager

In the period, investors continued to respond positively to ongoing vaccine rollouts worldwide and the prospect of economies re-opening at some point later in the year, thereby anticipating strong profit recovery across the equity market. In parallel, and reflecting this optimism over future recovery, inflation expectations and bond yields rose significantly as well. This combination provided a perfect environment for the continuation of the rally in so-called “value” areas, a dynamic that started in November 2020 when first vaccine headlines took over Covid announcements worldwide.

Consequently, these so called “value” sectors had strong performance in Q1, with Financials, Oil, Basic Goods, and Autos leading the way. Given our natural little or no exposure to these sectors – which we consider structurally and fundamentally unappealing – the Fund’s relative performance in the period was subdued.

Despite this headwind, it was not all bad news. Our large exposure to Industrial stocks was encouraging as the underlying names benefit from increasing expectations around economic activity.

For example, mining equipment company Epiroc, and lock maker Assa Abloy, among others, performed very well. In fact, some stocks in this area have been so strong that we have started to reduce our exposure to them due to a somewhat limited short-term upside. In addition – to a lesser extent – we saw strong performance coming from some of the names we own which are specifically sensitive to economies re-opening, such as contract catering company Compass, and UK housebuilder Taylor Wimpey. We initiated on some of these reopening after their sharp stock prices’ fall early last year.

On the negative side, we saw significant weakness in our renewable energy related names with Vestas, Orsted and Solaria all weakening. The value of these businesses depends on profits from projects many years/decades in the future and, as bond yields rise, the present values of these profits are discounted at higher rates, therefore reduced. Post the euphoria of Biden election in the US and the Democratic win of the Senate race in Georgia in January, renewable energy related stock prices spiked up. We took this as an opportunity to take some profits, and consequently the drag from their subsequent underperformance was reduced. Nevertheless, we think these areas still have great long-term potential thus we keep an eye open and are willing to reconsider our allocation in the future.

Looking forward, the “value” sectors mentioned earlier - which for much of last year had lagged the market given its rally – are now trading at or above pre-Covid levels thus reducing the room for a further potential catch-up. Unless there is a new substantial increase in inflation expectations for 2H 2021, the headwind to our relative performance is thus likely to abate. In any event, we stick to our long-standing investment focus on secular growth companies and continue to take periods like Q1 2021 as opportunities to add new names to the Fund whose stock prices have temporarily performed poorly.