Report December 2023
Columbus class I is up 4.5% in December, 9.0% in 2023 and 37.4% in the last 5 years. This was a good end of the year for European midcaps (MSCI Mid Europe: +8% in Q4), and in general for equity markets (Stoxx 600: +6% in Q4), but on the big context for small/midcaps, it was just a bounce after a weak 2022 (MSCI Midcaps: -21%).
In 2023 the small/midcap asset class continued to underperform the US “big 7” stocks, but it was good to see that the year-end rally in bond markets was followed by a good recovery in small/midcaps. We believe there is light at the end of the tunnel for European midcaps, and we also detect that the investment community is starting to pay attention to the space. Recent WSJ article is a good example (“Why Now May Be the Time To Invest in Midcap Stocks” Jan.2024)
The recent bond rally changes everything. Such a material change in trend is very relevant for 2 reasons: 1) Business and families can now finance cheaper than months ago, and it’s not just the cost, the fear of higher rates is a deterrent to take business decisions. Prospects of a more stable rate environment will ease fears and facilitate refinancing. 2) The rates level is the key factor for asset pricing and explains large monetary flows. Short-term monetary funds reached an all-time high in 2023, investors moved quickly into long-term rates in Q4 2023 and partly into midcaps. The alternative of fixed income is less appealing, and we believe there is no other asset class more interesting that high yields in quality smallcap equities. European midcaps continue to offer very interesting valuation levels and relatively good prospects, even if macro prospects continue to be uncertain.
We continue to see deep value in many high-quality companies in Europe which have solid growing cash flow prospects. The opportunity to invest in quality growth companies in Europe is still there, no matter if the macro situation can remain subdued for some time or if inflation does not return to the 2% target for some time.
There is excessive value concentration on the “Big 7” stocks, usually a driver of low returns in the long-term. An open economy requires a large group of companies that respond to economic needs and a good selection of midcaps tends to have better revaluation in the long term than the market average. Market consensus expects the economy to slow down in 2024 and begin a period of rate cuts that may be favorable for bond and equity valuations. The risk of a macro adjustment remains present. In this environment, we are convinced that Columbus’ portfolio is relatively well positioned.
Regarding Columbus portfolio, during the month of December, the return of some stocks stands out. The best performing stocks in December coincide with some companies where we recently increased our stakes such as Mobico (+27%), Prysmian (+17%), YouGov (14%) or Trainline (+13%). If we look at the full year 2023 the best performing stocks included Elecnor, Buzzi, Computacenter, Salcef, EFG International and Auto Trader.
On the negative side, during December financials continued to suffer from lower rates prospects (Unicaja: -13%, SCOR: -9%, Mapfre: -4%). Nevertheless, we retain exposure (c.17% of NAV) to several low-risk financials as current rates will continue to support earnings, value remains very supportive, and we see good earnings momentum particularly in insurance (we own SCOR, Ageas and Hiscox). Stocks that detracted performance in full year 2023 (partly recently recovering) include: Duerr, Mobico.
Over the past 2 months we have been very busy visiting more than 50 companies and made several changes in the portfolio. Recent additions to our portfolio include Kinepolis, an unappreciated growth and transformation story in cinemas, Befesa, a turnaround story in metal recycling, and Fresenius, another deep value turnaround story in pharma. Year 2024 appears to be favorable, despite the first trading days have been complex. The macro-outlook in our view is likely to set the tone, while rates could be supportive. At some point we expect a rerating for quality European midcaps, and we want to be ready to capture its long-term potential.
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The Columbus Fund can be purchased through the AllFunds, Inversis and Fundsettle platforms. Columbus has a Master-Feeder structure. The Pareturn GVC Gaesco Columbus European Equity Fund in Luxembourg (master) and the GVC Columbus European Equties FI fund (subordinate). The Luxembourg vehicle offers institutional and retail share classes denominated in euros and sterling.
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