18 October 2022
By Graeme Bencke
September brought tangible signs of consumer spending beginning to soften. Fedex, the US listed parcel delivery firm warned on profits citing "global volume softness that accelerated in the final weeks of the quarter". Nike, the giant sportwear group also brought down the market's expectations mentioning that consumers are "facing greater economic uncertainty" and that "promotional activity across the marketplace is accelerating". In Europe, and particularly the UK, inflation remains a headwind partly as a result of currency weakness. At bellwether UK high street fashion group, Next, this led to a reduction in earnings guidance during the month, and an increased level of caution regarding the consumer spending outlook. These are not companies held on the fund but give useful anecdotal evidence of the economic picture.
On the portfolio there were no new companies added or positions sold during September. Regular readers will know that our investment horizon extends 3-5 years out and so shorter term demand cycles can bring attractive opportunities to add to an existing holding, or establish a new position. A good example of which was Lumentum, the US listed photonics component supplier, which we added to on weakness in September after a conversation with management reassured us of our longer term outlook for the business. Our position in Volkswagen was also the focus of much attention during the month after their successful floatation of Porsche AG. The newly listed company met with strong investor demand and at the time of writing continues to trade higher. There is talk of a possible future spin-out of Lamborghini, and potentially even Bentley, two other luxury brands held within the group. We continue to see significant inherent value in the core VW business as they successfully transition the business towards electric vehicles, while the market focuses only on the near term demand issues.
The Fund slightly underperformed the benchmark during September, but as always there was a range of contributions from across the holdings. The largest detractors were IQVIA, the US listed life science analytics and services provider, and MasTec, the recently added US infrastructure services group. Neither company released news of a materially negative nature and we see little or no long term read-through from the monthly volatility. The same is true for Hubbell, the US listed electrical network components business, which provided the most positive contribution. For all three companies we continue to see very significant avenues of growth over the coming few years.
Our aforementioned conversation with Lumentum, whose laser sensors are increasingly used in machine vision applications such as security and smart buildings, underscored the explosion of innovation happening in the area of machine vision and related technologies. This impacts a number industries which drive, enable and adopt this innovation. We see clear winners and losers from this transition and have several holdings in the Fund which are positioned at the heart of the development. We are looking forward to sharing our thoughts on this with our clients and readers in a report in the coming weeks.