Reports

February 2023 (click here to download)

VAM US Micro Cap Growth Fund*

The Fund’s holdings assigned to the health care and consumer staples sectors were the largest source of positive relative returns. Holdings in the consumer discretionary and financials sectors detracted from relative returns. At month end, the Fund was overweight the consumer staples and industrials sectors, and underweight the health care and financials sectors.

The holding that contributed the most to the Fund’s relative returns during the month was e.l.f. Beauty, Inc. (Ticker: ELF-US). e.l.f. Beauty, Inc. is a leading manufacturer of mass market and clean beauty products. The company was a top contributor during the month after reporting December 2022 results well above estimates and raising guidance above consensus expectations. Revenue growth accelerated significantly to +49% year-over-year and EPS guidance was increased fiscal year 2023 (March) by 28%. The Manager believes guidance and consensus estimates remain too low.

The holding that detracted the most from the Fund’s relative returns during the month was Credo Technology Group Holding Ltd. (Ticker: CRDO-US). Credo Technology Group Holding Ltd. engages in the development of connectivity solutions and products for the data infrastructure market. In early February, the company pre-announced negatively for the April 2023 quarter with revenues expected to be 40% lower than consensus expectations as its largest customer is undergoing an inventory reduction cycle in the first half of 2023. The Manager did not make any changes to the position as it believes this inventory correction is transitory, with the large customer expected to return with ordering in the second half of 2023 while the company remains in the early stages of ramping revenues with additional hyperscaler customers.

VAM US Small Cap Growth Fund

At month end, holdings assigned to the health care and consumer staples sectors were the largest source of positive relative returns. Holdings in the information technology and the industrials sectors detracted from relative returns. At month end, the Fund was overweight the information technology and industrials sectors, and underweight the health care and real estate sectors.

The holding that contributed the most to the Fund’s relative returns during the month was e.l.f. Beauty, Inc. (Ticker: ELF-US). e.l.f. Beauty, Inc. is a leading manufacturer of mass market and clean beauty products. The company was a top contributor during the month after reporting December 2022 results well above estimates and raising guidance above consensus expectations. Revenue growth accelerated significantly to +49% year-over-year and EPS guidance was increased fiscal year 2023 (March) by 28%. The Manager believes guidance and consensus estimates remain too low.

The holding that detracted the most from the Fund’s relative returns during the month was Credo Technology Group Holding Ltd. (Ticker: CRDO-US). Credo Technology Group Holding Ltd. engages in the development of connectivity solutions and products for the data infrastructure market. In early February, the company pre-announced negatively for the April 2023 quarter with revenues expected to be 40% lower than consensus expectations as its largest customer is undergoing an inventory reduction cycle in the first half of 2023. The Manager did not make any changes to the position as it believes this inventory correction is transitory, with the large customer expected to return with ordering in the second half of 2023 while the company remains in the early stages of ramping revenues with additional hyperscaler customers.

VAM US Mid Cap Growth Fund

The VAM US Mid Cap Growth Fund performance benefitted from holdings in the consumer discretionary and energy sectors. Holdings in the health care and information technology sectors detracted from relative returns. At month end, the Fund was overweight the consumer discretionary and the industrials sectors, and underweight the materials and real estate sectors.

The holding that contributed the most to the Fund’s relative returns during the month was Axcelis Technologies, Inc. (Ticker: ACLS-US). Axcelis Technologies, Inc. engages in the manufacture of ion implantation capital equipment for the semiconductor chip manufacturing industry. In February, the stock was a top contributor after reporting strong fourth quarter 2022 earnings and providing 2023 revenue guidance above consensus expectations. The Manager took profits in the Fund as the stock’s valuation expanded and technical position became overbought.

The holding that detracted the most from the Fund’s relative returns during the month was BILL Holdings, Inc. (Ticker: BILL-US). BILL Holdings, Inc. engages in the provision of cloud-based software solutions to simplify, digitise and automate complex back-office financial operations for small and mid-sized businesses. In February, the company reported fiscal second quarter 2023 results that were better than expectations, but guided fiscal third quarter revenue 2% below and key metric total payment volume growth to be 15% below expectations driven by a broad macro slowdown in its customer base. The Manager eliminated the position as visibility on the company’s growth trajectory for future quarters is likely to remain low.

VAM US Large Cap Growth Fund

The VAM US Large Cap Growth Fund performance benefitted from holdings in the industrials and energy sectors. Holdings in the consumer discretionary and health care sectors detracted from relative returns. At month end, the Fund was overweight the financial and communication services sectors, and underweight the consumer staples and health care sectors.

The holding that contributed the most to the Fund’s relative returns during the month was nVent Electric plc (Ticker: NVT-US). nVent Electric Plc engages in the provision of electrical connection and protection solutions. The company reported earnings that beat analyst expectations — both on revenue and earnings. Additionally, the company issued positive guidance due to organic growth and good execution

The holding that detracted the most from the Fund’s relative returns during the month was Tesla Inc. (Ticker: TSLA-US). Tesla, Inc. engages in the design, development, manufacture and sale of fully electric vehicles, and energy generation and storage systems. The company was not owned by the portfolio as it did not meet the model’s criteria which includes a combination of valuation, revision, momentum and duration factors.

VAM Emerging Markets Growth Fund

The VAM Emerging Markets Growth Fund performance was aided by holdings in the consumer discretionary and utilities sectors, as well as in China and India. Exposures to the materials and information technology sectors, as well as South Korea and Taiwan detracted from relative returns. At month end, the Fund was underweight China and Taiwan and overweight Mexico and the United States.

The holding that contributed the most to the Fund’s relative returns during the month was Grupo Financiero Banorte SAB de CV Class O (Ticker: GFNORTEO-MX). Grupo Financiero Banorte is a leading private sector commercial bank in Mexico. The earnings of the company remain strongly supported by the higher interest rate environment in Mexico and the relative performance of the stock remains strong as a result of its conservative lending behaviour, minimising asset quality risk in the current economic slowdown. The Mexican Peso has also outperformed most EM currencies by a wide margin, which helped the total return of holding the stock.

The holding that detracted the most from the Fund’s relative returns during the month was Techtronic Industries Co., Ltd. (Ticker: 669-HK). Techtronic Industries Co., Ltd. corrected significantly following an obscure short seller report. The report argued that the company’s gross margins and earnings were overstated. Given that the company was in the quiet period, it could not immediately respond to the allegations. It reported at the beginning of March when it issued an official rebuttal. The company strongly denied all allegations and provided answers to all initial questions. Importantly, it highlighted that the Milwaukee brand has outgrown peers by 2-3x since 2013, highlighting the strength of the company’s management team. In response to the gross margin allegations, management highlighted the Milwaukee brand as well as the battery business as the main growth drivers. During 2021, total gross margins increased by 54bps, of which 57bps was attributable to the growth of the Milwaukee business. The gross margins on batteries are even higher than the Milwaukee business and have been growing at an average rate of over 30% the past six years.

VAM World Growth Fund

The VAM World Growth Fund performance was aided by exposures in the materials and consumer discretionary sectors, as well as in United States and Germany. Exposures in the energy and information technology sectors, as well as in Hong Kong and Canada, detracted from relative returns. At month end, the Fund was overweight Germany and Japan, and underweight the United States and Australia.

The holding that contributed the most to the Fund’s relative returns during the month was Goldwin Inc. (Ticker: 8111-JP). Goldwin Inc. is a Japanese-based leading manufacturer and distributor of sportswear and sporting equipment with both its own brand and leading global brands in its distribution portfolio including North Face, Helly Hanson and Speedo to name a few. In its most recent quarter, it produced stronger-than-expected results for both revenues and profits (primarily driven by robust North Face trends and better cost controls, it is the leading North Face distributor in Japan). Company management gave a stronger outlook for the next six months noting improving supply chains, strong start to winter season trends and improving inbound tourism spending trends. Although earnings estimates were raised to new highs, the Manager sees further upside given the strong start to the winter sports season.

The holding that detracted the most from the Fund’s relative returns during the month was Precision Drilling Corporation (Ticker: PD-CA). Precision Drilling is a Canadian-based fully integrated energy services and oilfield drilling company providing drilling equipment, well services, and rental equipment serving both US and Canadian markets. For the last several quarters, it has been reporting very strong revenue, earnings and near record cash flow growth driven by stronger oil prices and accelerating onshore drilling activity, particularly in the Canadian market. The most recent quarter, however, it noted a slight slowdown in forward drilling activity and suggested rates might be in the process of peaking. After reporting stronger results for the past two years, this was
taken negatively by the market as a sign that drilling activity has peaked in the medium term for the sector. The Manager continues to like the company long term, but has reduced its position across all funds in the short term.

VAM International Opportunities Fund

The VAM International Opportunities Fund performance was aided by holdings in the health care and industrials sectors, as well as in Germany and Australia. Exposures in the information technology and energy sectors, as well as Taiwan and Canada, detracted from relative returns. At month end, the Fund was overweight Germany and the United Kingdom, and underweight Australia and India.

The holding that contributed the most to the Fund’s relative returns during the month was Rolls-Royce Holdings plc (Ticker: RR-GB). Rolls Royce Holdings is a UK-based industrial conglomerate specialising in manufacturing aerospace, marine and gas turbines for both the civil and military aviation sectors. This is more of a turnaround story after years of cost and supply chain mismanagement whereby the company implemented a turnaround plan in the middle of 2022 that is just now starting to bear fruit. In late February, the company reported substantially stronger results versus expectations with the turnaround plan accelerating faster than expected driven by stronger order trends as well as better cost and efficiency controls, which led to much better margin expansion than expected. The big driver is the turnaround in its civil division (approximately 50% of revenues) which after years of losses finally registered positive margins of 2-3%. While that doesn’t sound like much, several industry peers margins are in the 15-20% range, so the Manager believes there is still substantial room for further margin improvement over the next several quarters.

The holding that detracted the most from the Fund’s relative returns during the month was Precision Drilling Corporation (Ticker: PD-CA). Precision Drilling is a Canadian-based fully integrated energy services and oilfield drilling company providing drilling equipment, well services and rental equipment serving both US and Canadian markets. For the last several quarters, it has been reporting very strong revenue, earnings and near record cash flow growth driven by stronger oil prices and accelerating onshore drilling activity, particularly in the Canadian market. The most recent quarter, however, it noted a slight slowdown in forward drilling activity and suggested rates might be in the process of peaking. After reporting stronger results for the past two years, this was taken negatively by the market as a sign that drilling activity has peaked in the medium term for the sector. The Manager continues to like the company long term, but has reduced its position across all funds in the short term.

VAM Global Infrastructure Fund

The Fund and the wider listed infrastructure sector suffered from poor performance during February as rates rallied significantly. Share prices remain sensitive to higher interest rates, with listed infrastructure particularly sensitive given the high duration that comes with long-dated, contracted cash flows.

During the month, Crown Castle Inc (“CCI”) was added to the portfolio. The FCM Investment Team has been incrementally increasing exposure to the digital infrastructure sector, driven by attractive valuations and solid operating fundamentals. CCI is a US-listed owner of communications infrastructure, which primarily includes cell towers and fibre networks. The company is large, liquid and well managed, with a strategic focus on the deployment of fibre and small cell communications equipment in order to benefit from the growth of 5G technology. The company’s attractive valuation, following a sharp share price decline over the preceding months, is reinforced by an earnings profile that is expected to continue growing despite wider economic weakness.

The Fund’s portfolio companies continue to boast excellent dividend profiles, with dividend distributions supported by heavily contracted cash flows which typically benefit from a degree of inflation linkage. During the month, New Zealand-listed fibre owner Chorus announced that it would pay a 17 cents per share dividend, growing 21% year-on-year. US-listed renewable energy owner Clearway Energy Inc (“CWEN”) released results which announced a dividend of 37.45 cents per share, an increase of 8% versus the same period last year. CWEN maintains a long-term strategic target of growing its dividend by 5-8% each year, a target it extended during the month to 2026.

Sustainability-led strategic developments continue to be an area of focus for holdings within the Fund, often driven by the financial benefits they can provide in addition to the sustainability impact. Data centre owner Equinix (“EQIX”) has significantly increased its backing of renewable energy projects with the addition of five new Power Purchase Agreements (PPAs) in Spain totalling 225 megawatts. The projects will be operational in 2025 and are forecast to generate enough power to match consumption at EQIX’s data centres in Madrid, Barcelona and Seville.

*Fund is currently closed to new subscriptions.

Sources: Driehaus Capital Management LLC, Foresight Capital Management, FactSet Research Systems, Inc., Reuters, Yahoo Finance 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 February 2023. The performance numbers for the Funds 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.

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South African Investors: This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).

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