Several team members and I spent the first couple weeks of May in Europe which proved great timing given the election results in the U.K. (more on that later). I wanted to highlight some interesting takeaways from our trip to Europe and provide an update on Cambridge Growth Companies Corporate Class.
Everywhere you look governments are trying to become more efficient
It sure is an interesting time to be a Portfolio Manager – it seems there is a wave of privatizations that is just getting underway. Having come through the financial crises of 2008 and 2011 with severely impaired balance sheets, governments around the world face some very difficult decisions given their limited financial resources and growing budget deficits. As a Canadian, and as someone who started his career covering utilities, I never expected to see our flagship utility (Hydro One) as a privatization candidate. But, I suspect before the year is over the Ontario government will no longer be the sole shareholder of this business. The simple fact is governments (e.g. state, provincial, federal) need to raise money to fund their budgets and are looking to their cost structures and balance sheets for savings and assets they no longer can afford to own. Having spent part of my time in Portugal, it was interesting to draw parallels given the country is in the midst of privatizing its national airline (TAP Portugal) and the largest lender in the country (Novo Banco – formerly Espirito Santos). Stay tuned, but I suspect more opportunities to buy world class assets from forced sellers (i.e. governments) will prove ideal hunting ground for the significant amounts of cash we hold across our funds.
Election anticipation in the U.K. drove capital markets activity to a halt – expect more M&A activity and IPOs in Europe
While it was a difficult week to schedule meetings given the uncertainty surrounding the election, it also proved to be ideal timing for us to see first-hand the level of optimism and euphoria (admittedly among pro-business voters) of a Conservative election victory. This can be seen in the strength of the sterling which has been on the rise, and in the overall firming of IPO notifications in the weeks since the election. A Conservative majority was deemed off the table given how fractured the vote was among the U.K. population. Going into the polls, it was expected that the election would result in a coalition government with the Conservatives needing to find a minority partner. A majority government will provide stability and allow the U.K. Parliament to legislate its agenda with less pushback and bureaucracy. It remains to be seen if they can actually engineer enough support to exit the EU by 2017 as David Cameron has promised.
In terms of impact on the investment climate, a lot of potential acquisitions and IPOs were put on hold pending the election result. As it turned out, the result is more favourable than the one everybody had anticipated. I think over the balance of 2015 and into 2016 we will see more cross-border deals being led by U.S. businesses with too much cash and not enough reinvestment opportunities. We have always said that if local investors don’t close the valuation gap in Europe, then large multinational corporations will do it for them. We only need to look to CGI Group or Alimentation Couche Tard for two great examples of Canadian-listed companies that created value through transformational international acquisitions in recent years. I expect that we will see more of our core holdings follow suit, if the strategy and price make sense.
What does this mean for Cambridge clients?
For those who have been consistently following us or are Cambridge fund holders, you know we have been excited about Europe for over a year. The quality businesses in the region were at the mercy of investor sentiment and this has started to improve. Governments around the EU are working to become more shareholder- friendly because they realize it is the only way to attract the capital necessary to invest in their important projects (e.g. infrastructure, IT, social programs, etc.). Between Cambridge Global Equity Corporate Class, Cambridge Global Dividend Fund, Cambridge Growth Companies Corporate Class and the foreign content in our Canadian and U.S. mandates, we have found no shortage of opportunities for clients. The timing of the launch of Cambridge Growth Companies Corporate Class couldn’t have been better. Obviously we didn’t anticipate sentiment would begin to improve this quickly but it’s nice to have had some of our best ideas better recognized by their local markets. See below for a more detailed fund update.
Cambridge Growth Companies Corporate Class update
It has been about five months since my last update (which can be read here). At the time, I highlighted how I’d been increasing my exposure to Europe given the improving investment climate there. I also mentioned it was an area that may quietly outperform in 2015 and so far we have seen that the German and French markets are both up roughly 20% in local currency. The fund has the lowest level of cash on hand since inception (~8%) having found a number of very compelling opportunities in the last three months. The U.S. remains the core at roughly 50% of total assets. About 1/3 of the assets are invested in businesses outside North America which is also at the highest level in the last 10 months. A big reason for this has been two IPOs in Europe that fit perfectly with the mandate of this fund and came at very compelling valuations, both are household names (Thule Group, Auto Trader Group PLC) which combined represent about 10% of the fund. I had the chance to visit the headquarters of Auto Trader while in Manchester, England and sit down with the CEO and Chairman. I was also able to have breakfast with the CEO and CFO of Thule while they were in London meeting investors.
We look forward to keeping you up-to-date on our travels and takeaways and will continue to work hard at earning your support and trust.