VAM Funds (Lux) Commentaries

July 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 health care and information technology sectors. Holdings in the materials and utilities sectors detracted from relative returns. At month end, the Fund was underweight the health care sector and underweight in the materials sector.

 

The holding that contributed the most to the Fund’s return during the month was eHealth, Inc. (ticker: EHTH-US). EHTH is a health care information technology company managing a Medicare Advantage insurance brokering website. They announced strong first quarter earnings in April 2019 that drove positive estimate revisions. The Manager has maintained a large weighting, given its conviction that estimates still have not adequately increased to reflect the impact from their expanded commercial organisation.

 

The holding that detracted the most from the Fund’s return during the month was Lovesac Company (ticker: LOVE-US). The Lovesac Company (LOVE) is a direct-to-consumer specialty furniture brand. The stock was a top detractor as it declined in response to fears about the impact tariffs on Chinese imports would have on margins. LOVE is transitioning production out of China, so the Manager expects the negative impact to be transitory.

VAM US Small Cap Growth Fund

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

 

The holding that contributed the most to the Fund’s return during the month was FTI Consulting, Inc. (ticker: FCN-US). FCN is the largest provider of turnaround, restructuring, bankruptcy and related services in the US. They are benefitting from strong hiring trends and an improved internal growth strategy, which is allowing them to aggressively steal market share. On 25th July, FCN reported strong June Quarter 2019 results. Organic growth was +20% year over year and earnings grew 58% year over year, beating the consensus earnings per share estimate by a staggering 78%. Such strong outperformance typically indicates the street is underestimating FCN’s growth prospects moving forward.

 

The holding that detracted the most from the Fund’s return during the month was Omnicell, Inc. (ticker: OMCL-US). OMCL is a commercial medical device company manufacturing and selling pharmacy distribution systems for hospitals. Over the past 12 months they have accelerated growth due to contributions from new product cycles, enabling them to achieve positive estimate revisions. In June, OMCL was the subject of a short report that alleged accounting deceit. Though the Manager found the report unverifiable and likely specious, the technical outlook deteriorated substantially. Due to relatively more attractive opportunities elsewhere in the portfolio, the Manager sold its position.

VAM US Mid Cap Growth Fund

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

 

The holding that contributed the most to the Fund’s return during the month was FTI Consulting, Inc. (ticker: FCN-US). FCN is the largest provider of turnaround, restructuring, bankruptcy and related services in the US. They are benefitting from strong hiring trends and an improved internal growth strategy, which is allowing them to aggressively steal market share. On 25th July, FCN reported strong June quarter 2019 results. Organic growth was +20% year over year and earnings grew 58% year over year, beating the consensus earnings per share estimate by a staggering 78%. Such strong outperformance typically indicates the street is underestimating FCN’s growth prospects moving forward.

 

The holding that detracted the most from the Fund’s return during the month was Omnicell, Inc. (ticker: OMCL-US). OMCL is a commercial medical device company manufacturing and selling pharmacy distribution systems for hospitals. Over the past 12 months they have accelerated growth due to contributions from new product cycles, enabling them to achieve positive estimate revisions. In June, OMCL was the subject of a short report that alleged accounting deceit. Though the Manager found the report unverifiable and likely specious, the technical outlook deteriorated substantially. Due to relatively more attractive opportunities elsewhere in the portfolio, the Manager sold its position.

VAM US Large Cap Growth Fund

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

 

The holding that contributed the most to the Fund’s return during the month was Apple Inc. (ticker: AAPL-US). Apple, Inc. engages in the design, manufacture, and marketing of mobile communication, media devices, personal computers and portable digital music players. The company was up during the quarter as it reported positive earnings and guidance above street estimates.

 

The holding that detracted the most from the Fund’s return during the month was Alexion Pharmaceuticals, Inc. (ticker: ALXN-US). Alexion Pharmaceuticals, Inc. is a biopharmaceutical company which focusses on serving patients with devastating and ultra-rare disorders through the development and commercialisation of life-transforming therapeutic products. Although the stock declined during the month, the company did beat consensus estimates on both the top and bottom line. Additionally, the company also raised revenue and earnings per share targets for fiscal year 2019.

VAM Emerging Markets Growth Fund

The VAM Funds (Lux) – Emerging Markets Growth Fund performance was aided by holdings in the materials and communication services sectors, as well as in Brazil and South Korea. Exposures to financials and utilities sectors, as well as in Taiwan and India, 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 Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (ticker: TSM-US). Taiwan Semiconductor Manufacturing is the world’s largest independent semiconductor foundry. The shares outperformed in July, after they reported second quarter earnings that were better-than-expected. The semiconductor industry has been in a downturn since late 2018, but during the results TSMC management said they think we have passed the bottom of the cycle. They also said they have seen an acceleration in demand for chips related to the deployment of the new 5G wireless standard. TSM is also benefitting from the proliferation of new kinds of chips that will drive the growth of Artificial Intelligence and Internet of Things.

 

The holding that detracted the most from the Fund’s return during the month was HDFC Bank Limited Sponsored ADR (ticker: HDB-US). HDFC Bank, a leading bank in India, disappointed in July following a weaker-than-expected earnings report. The company has been delivering far above market growth rates for many years, but the recent macro slowdown in India has finally hit their top-line expansion and the stock suffered as a result. This appears to the Manager to be a manageable, mid-cycle slowdown and not the end of a long credit growth cycle.

VAM World Growth Fund

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

 

The holding that contributed the most to the Fund’s return during the month was Magazine Luiza S.A. (ticker: MGLU3-BR). Magazine Luiza is a leading multi-channel retail operator in Brazil. They operate mobile, internet, and traditional brick and mortar stores primarily in Rio, Sao Paulo, Fortaleza and Belo Hrizonte. They have been benefitting from a recovering Brazilian consumer the last 12 months, as well as many self-help initiatives to streamline costs and transition their business model to more of a mobile and internet shopping platform, which is driving increasing profitability and stronger margins. On 5th July, they held their annual general meeting, highlighting the improving trends and outlook which led to substantial outperformance during the month.

 

The holding that detracted the most from the Fund’s return during the month was Illumina, Inc. (ticker: ILMN-US). Illumina designs and manufactures large scale medical and biological analytical equipment. They are considered the global leader for sequencing and genomic research equipment, but unfortunately this can be a lumpy business from an orders and revenue perspective (i.e. order flow from pharmaceutical and healthcare companies can be quite volatile for any given quarter). They reported disappointing second quarter results in late July with a cautious outlook mostly driven by external macro factors (trade war, Brexit, etc.). This cautious outlook, coupled with a high valuation well above the 10-year average led to a sharp pull-back in the stock post results. The Manager continues to like the intermediate to longer term outlook, however, and continues to hold its position despite the short-term volatility.

VAM International Real Estate Equity Fund

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

 

The holding that contributed the most to the Fund’s return during the month was Cyrela Brazil Realty SA Empreendimentos e Participacoes (ticker: CYRE3-BR). Cyrela is a leading middle-high income residential homebuilder in Brazil. Following challenging years in Brazil economy and real estate sector, numerous signs of improvement have emerged throughout the second half of 2018 and in 2019. These include clearing existing inventories that had been pressuring the company’s margins and cash flows in recent years. A pick up in sales and selling through the inventory backlog has improved cash flows, leading the company to launch more new project launches, improve sales speed, margins and future earnings outlook. Recent interest rates cuts from Brazil Central Bank have reached important levels to boost mortgage financing for homebuyers. Improvements in expectations of Brazil macroeconomic conditions, with near-term hopes for structural pension reform, have led to improving launches and sales outlooks boosting Cyrela and other homebuilders performance during July.

 

The holding that detracted the most from the Fund’s return during the month was Balfour Beatty plc (ticker: BBY-GB). Balfour Beatty is a leading engineering and construction firm with operations and infrastructure portfolio investments in the UK and USA. During the month of July, a number of unfavourable factors negatively impacted the share price performance. Macroeconomic risks related to Brexit, a changing of UK’s Prime Minister and senior leadership, and British Pound weakness during the month, all led to uncertainty about near-term infrastructure investment in the UK. The macro risks coupled with a company-specific concern related to allegations in maintenance records for some of the company’s military housing records negatively impacted sentiment and stock performance.

VAM International Opportunities Fund

The VAM Funds (Lux) – International Opportunities Fund performance was aided by holdings in the financials and consumer staples sectors, as well as in South Korea and Germany. Exposures to the materials and health
care sectors, as well as in United Kingdom and Australia, detracted from relative returns. As of month end, the Fund was underweight South Korea and overweight United Kingdom.

 

The holding that contributed the most to the Fund’s return during the month was M&A Capital Partners Co. Ltd. (ticker: 6080-JP). M&A Capital Partners is the number two player in the M&A advisory market in Japan. Given the ageing population and unique cultural makeup of Japan’s corporate environment (thousands of small businesses with one owner and no succession plan) there is a long-term structural market demand for advisory services to Japan’s small to medium sized enterprises. As the number two player in basically a duopoly market, they are strongly benefitting from this structural growth market. They reported stronger-than-expected third quarter results in July and increased guidance for the remainder of the year, which led to strong outperformance of the stock during the month.

 

The holding that detracted the most from the Fund’s return during the month was Balfour Beatty plc (ticker: BBY-GB). Balfour Beatty is a leading engineering and construction firm with operations and infrastructure portfolio investments in the UK and USA. During the month of July, a number of unfavourable factors negatively impacted the share price performance. Macroeconomic risks related to Brexit, a changing of UK’s Prime Minister and senior leadership, and British Pound weakness during the month, all led to uncertainty about near-term infrastructure investment in the UK. The macro risks coupled with a company-specific concern related to allegations in maintenance records for some of the company’s military housing records negatively impacted sentiment and stock performance.

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 July 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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