VAM Funds (Lux) Commentaries

August 2019 (click to download)

VAM US Micro Cap Growth Fund

The VAM Funds (Lux) – US Micro Cap Growth Fund performance benefitted from holdings in the consumer discretionary and information technology sectors. Holdings in the real estate and industrials sectors detracted from relative returns. At month end, the Fund was overweight the consumer discretionary sector and underweight the real estate sector.

 

The holding that contributed the most to the Fund’s return during the month was Fastly, Inc. (ticker: FSLY). The company provides real-time content delivery network services with its edge cloud platform. During the month, it reported a strong quarterly report where revenue exceeded expectations. As the stock initially sold off after its report, it reached attractive valuation levels. At that time the largest shareholder aggressively bought the stock, taking its stake from under 10% of the float to 35% of the float, which fueled a sharp rally in the stock. The Manager maintains its position in the stock as it finds the stock attractive.

 

The holding that detracted the most from the Fund’s return during the month was Fluidigm Corporation (ticker: FLDM). FLDM is a commercial stage life sciences tools company, commercialising products that quantify and characterise biological constituents for researchers. In August, FLDM detracted from the Fund after they reported second quarter operating results below consensus expectations and also gave September quarter guidance below expectations. This performance was disappointing, especially given recent strong operating performance. Looking forward, however, the resulting downward price movement has been excessive, and the current valuation is at a level that the Manager believes is unsupported by fundamentals. The Manager continues to hold a small position as it believes the company is differentiated, and has a strong product cycle that is still ongoing and it expects the stock to recover.

VAM US Small Cap Growth Fund

The VAM Funds (Lux) – US Small Cap Growth Fund performance was aided by holdings in the consumer discretionary and information technology sectors. Holdings in health care and utilities sectors detracted from relative returns. At month end, the Fund was overweight the consumer discretionary sector and underweight the health care sector.

 

The holding that contributed the most to the Fund’s return during the month was Roku, Inc. (ticker: ROKU). The company is an Over The Top (OTT) streaming platform company for television. Early in the month, ROKU reported June quarter earnings results that substantially exceeded expectations and showed an inflection in growth rates for its platform business, driven by robust active account additions and better monetisation of users as measured by ARPU (average revenue per user), two key operating metrics. This strong report drove a sharp appreciation in the shares following its report. The Manager maintains its position post the earnings report.

 

The holding that detracted the most from the Fund’s return during the month was Sarepta Therapeutics, Inc. (ticker: SRPT). SPRT is a clinical stage biotech company developing a portfolio of therapies to treat rare neuromuscular disorders. In August, SRPT detracted from the strategy after unexpected regulatory feedback delayed the launch of a novel therapy and increased uncertainty regarding the regulatory threshold for approvability of novel therapies. Despite this, the Manager maintains its position in SRPT, as they have demonstrated best in-class characteristics to date with their microdystrophin gene therapy construct which represents unprecedented potential benefit for Duchenne muscular dystrophy.

VAM US Mid Cap Growth Fund

The VAM Funds (Lux) – US Mid Cap Growth Fund performance benefitted from holdings in the consumer discretionary and industrials sectors. Holdings in the health care and utilities sectors detracted from relative returns. At month end, the Fund was overweight the consumer discretionary sector and underweight the health care sector.

 

The holding that contributed the most to the Fund’s return during the month was Roku, Inc. (ticker: ROKU). The company is an Over The Top (OTT) streaming platform company for television. Early in the month, ROKU reported June quarter earnings results that substantially exceeded expectations and showed an inflection in growth rates for its platform business, driven by robust active account additions and better monetisation of users as measured by ARPU (average revenue per user), two key operating metrics. This strong report drove a sharp appreciation in the shares following its report. The Manager maintains its position post the earnings report. The holding that detracted the most from the Fund’s return during the month was Sarepta Therapeutics, Inc. (ticker: SRPT). SPRT is a clinical stage biotech company developing a portfolio of therapies to treat rare neuromuscular disorders. In August, SRPT detracted from the strategy after unexpected regulatory feedback delayed the launch of a novel therapy and increased uncertainty regarding the regulatory threshold for approvability of novel therapies. Despite this, the Manager maintains its position in SRPT, as they have demonstrated best-in-class characteristics to date with their microdystrophin gene therapy construct which represents unprecedented potential benefit for Duchenne muscular dystrophy.

VAM US Large Cap Growth Fund

The VAM Funds (Lux) – US Large Cap Growth Fund performance benefitted from holdings in the information technology and communication services sectors. Holdings in financials and health care services sectors detracted from relative returns. At month end, the Fund was overweight the information technology sector and overweight the financials sector.

 

The holding that contributed the most to the Fund’s return during the month was Target Corporation (ticker: TGT-US). Target Corp. engages in owning and operating general merchandise stores. Target delivered a big second quarter earnings per share beat and raised fiscal year guidance (despite tariff headwinds flagged by others).

 

The holding that detracted the most from the Fund’s return during the month was Macy’s Inc (ticker: M-US). Macy’s, Inc. engages in the retail of apparel, accessories, cosmetics, home furnishings and other consumer goods. Macy’s missed its second quarter earnings largely driven by softer gross margins. The company blamed increased promotional activity to clear excess spring inventory and accelerated decline in international tourism.

VAM Emerging Markets Growth Fund

The VAM Funds (Lux) – Emerging Markets Growth Fund performance was aided by holdings in the financials and materials sectors, as well as in Brazil and China. Exposures to communication services and utilities sectors, as well as in Taiwan and Hong Kong, detracted from relative returns. As of month end, the Fund was underweight in Brazil and underweight in Taiwan.

 

The holding that contributed the most to the Fund’s return during the month was Notre Dame Intermedica Participacoes SA (ticker: GNDI3-BR). Notre Dame Intermedica provides managed care health services in Brazil, with a strong presence in the Sao Paolo area. The company continues to grow above expectations driven by a combination of robust organic growth in the health care plan division and a solid improvement in the medical loss ration (MLR). Once again, the improvement in MLR metrics was remarkable (declined 160 basis points year over year) driven by major initiatives such as: higher verticalisation (66% in the second quarter of 2019 vs. 59% in second quarter of 2018), the sale of more plans with copay (+14% year over year), strong growth of dental plans (30% in the second quarter of 2019) as well as growth in hospital operations (+25% year over year). Organic growth also accelerated with 89,000 new lives in the most recent quarter. The integration of their most recent acquisition, Greenline, is also evolving well, with additional synergies being identified.

 

The holding that detracted the most from the Fund’s return during the month was Tencent Holdings Ltd. (ticker: 700-HK). Tencent, a digital platform and gaming company, underperformed in August. The company’s second quarter revenue growth missed expectations due to weakness in the online ad market. Tencent was also impacted by broader weakness in Hong Kong, as protestors continued to clash with police and the government.

VAM World Growth Fund

The VAM Funds (Lux) – World Growth Fund performance was aided by exposures in the information technology and consumer discretionary sectors, as well as in the United States and Brazil. Exposures in materials and health care sectors, as well as in Denmark and Taiwan, detracted from relative returns. As of month end, the Fund was slightly underweight in the United States and overweight in Denmark.

 

The holding that contributed the most to the Fund’s return during the month was Roku, Inc. (ticker: ROKU). The company is an Over The Top (OTT) streaming platform company for television. Early in the month, ROKU reported June quarter earnings results that substantially exceeded expectations and showed an inflection in growth rates for its platform business, driven by robust active account additions and better monetisation of users as measured by ARPU (average revenue per user), two key operating metrics. This strong report drove a sharp appreciation in the shares following its report. The Manager maintains its position post the earnings report.

 

The holding that detracted the most from the Fund’s return during the month was Ulta Beauty Inc. (ticker: ULTA-US). Ulta Beauty is the leading operator of beauty stores and salon services in the US. The company has been growing quite strongly for the past several years in terms of new store growth, top and bottom-line growth, and same store sales growth (the metric used to measure sales growth at existing stores). Although cosmetics are considered largely recession proof, reality can sometimes bite quite differently and that’s precisely what happened in late August when they reported disappointing second quarter results. The weaker results and weaker outlook caught investors, including us, very much off guard (you could say it came out of left field) and the stock experienced a very negative reaction for several days following results. The Manager does not think the long-term growth outlook has changed, but certainly for the next several months, growth will be slower than it expected and, as a result, the Manager has reduced its position substantially until the company can find some stabilisation in its growth outlook.

VAM International Real Estate Equity Fund

The VAM Funds (Lux) – International Real Estate Equity Fund performance was aided by exposures in China and the United Kingdom, while exposures in Japan and Brazil detracted from relative returns. As of month end, the Fund was overweight the United Kingdom and underweight Japan.

 

The holding that contributed the most to the Fund’s return during the month was Tokyo Tatemono Co., Ltd. (ticker: 8804-JP). Tokyo Tatemono is a Japanese office and condo developer, and they reported solid first half results, tracking ahead of full year consensus tracking ahead of expectations. Japan office property fundamentals have continued to improve in recent years, however, the Japanese real estate sector has underperformed. Solid results, attractive valuation, with scope for improved shareholder friendly policies for the company and peers ahead, boosted investor sentiment throughout August.

 

The holding that detracted the most from the Fund’s return during the month was Multiplan Empreendimentos Imobiliarios SA (ticker: MULT3-BR). Multiplan is a leading mall operator in Brazil, focused on top quality properties. With more optimistic macro sentiment throughout 2019 on Brazil, the company reported inline results at end of July. Following the results, shares drifted lower throughout August due to limited evidence of improved consumer recovery and premium valuation. Multiplan remains well positioned, with more tangible signs of consumer improvements expected to come through ahead, boosting rents and earnings.

VAM International Opportunities Fund

The VAM Funds (Lux) – International Opportunities Fund performance was aided by holdings in the industrials and consumer discretionary sectors, as well as in Germany and Turkey. Exposures to the materials and health care sectors, as well as in Taiwan and South Africa, detracted from relative returns. As of month end, the Fund was overweight Germany and underweight Taiwan.

 

The holding that contributed the most to the Fund’s return during the month was Pegasus Hava Tasimaciligi A.S. (ticker: PGSUS-TR). Pegasus is the largest lowcost airline carrier in Turkey. The main driver of their renewed growth momentum the past 12 months has been a substantial increase in their international capacity with the introduction of new routes, allowing them to take market share and grow their international traffic by approximately 20% over the past several months. This, along with strong cost management leading to improving yields, has allowed them to post much stronger profitability than expected in each of the last two quarters. In early August, they reported very strong second quarter results, substantially better than sell-side estimates, and the market is finally taking notice of their improved growth outlook. Despite strong performance in the past few months, the stock still trades at a sizeable discount to the broader sector, so the Manager expects outperformance to continue for the medium term.

 

The holding that detracted the most from the Fund’s return during the month was OCI NV (ticker: OCI-NL). Balfour OCI is a producer and distributor of natural gas-based fertilizers and industrial chemicals primarily for agricultural end markets. In early August, an industrywide research piece was published suggesting end markets and pricing power were weakening across the agriculture supply chain, which started to hit the stock, as well as the entire sector. Then, in late August, these concerns were proven correct when they reported weaker-than expected second quarter results. That being said, the intermediate to longer-term outlook for increasing use of nitrogen fertilizers and methanol remains intact, and although the Manager has reduced its position, it remains a believer in the longer term story and growth potential.

Sources: Driehaus Capital Management LLC, FactSet Research Systems, Inc., Reuters and Bloomberg.

 

Featured securities were the top contributor to or detractor from return and were held by the Fund at some point during the month of August 2019. The performance numbers for the Fund are provided by VAM Funds (Lux). The performance discussed above represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance quoted.

 

The information presented is intended for the sole and exclusive use of VAM Funds and contains confidential information that should only be relied on by the intended recipient.

 

Disclaimer

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