VAM Funds (Lux) Commentaries

October 2021 (click here to download)

VAM US Micro Cap Growth Fund*

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

The holding that contributed the most to the Fund’s relative returns during the month was Xenon Pharmaceuticals Inc. (Ticker: XENE). Xenon Pharmaceuticals Inc. is a clinical stage therapeutics company developing novel treatments for epilepsy. In October, Xenon presented randomised placebo controlled Ph2 data, which demonstrated that its potassium channel modulator XEN-1101 significantly reduced seizure frequency versus a placebo with an acceptable safety profile. In doing so, the drug’s clinical risk declined and peak sales estimates increased, leading to significant stock appreciation. The Manager increased its exposure after the data as a top allocation in a follow-on financing

The holding that detracted the most from the Fund’s relative returns during the month was Protagonist Therapeutics, Inc. (Ticker: PTGX). Protagonist Therapeutics, Inc. is a clinical stage therapeutics company developing novel treatments for hematology and immune diseases. In September, Protagonist’s market cap fell precipitously when the FDA put its lead drug on a clinical hold based on findings from a preclinical safety model. In October, the stock recovered when the FDA lifted their clinical hold upon receiving additional clarifying information. The Fund held no exposure in September or October, though the benchmark did, leading to positive fund contribution in September and negative contribution in October. The Manager continues to have no exposure.

VAM US Small Cap Growth Fund

Holdings assigned to the information technology and health care sectors added the most to the Fund’s positive relative returns. The Fund’s holdings assigned to the real estate and consumer staples sectors were the largest source of negative relative returns. At month end, the Fund was overweight in the information technology and consumer staples 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 Dutch Bros Inc. Class A (Ticker: BROS). Dutch Bros Inc. Class A is an operator and franchisor of drive-through shops serving unique customisable beverages. Dutch Bros completed an IPO in September and as awareness built for its attractive unit economics and growth opportunity, the stock appreciated meaningfully in October. After a significant move higher, the Manager trimmed the position.

The holding that detracted the most from the Fund’s relative returns during the month was AMN Healthcare Services, Inc. (Ticker: AMN). AMN Healthcare Services, Inc. is a health care workforce solutions and staffing services provider to health care facilities. AMN sold off despite robust fundamentals as concerns built around exacerbated supply/volume shortages that could develop due to a potential vaccine mandate in the industry. The Manager lowered its exposure but continues to hold a position because AMN remains positioned to benefit from a favourable, structural supply and demand imbalance in the industry.

VAM US Mid Cap Growth Fund

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

The holding that contributed the most to the Fund’s relative returns during the month was Avis Budget Group, Inc. (Ticker: CAR). Avis Budget Group, Inc. offers vehicle rentals to premium commercial, leisure and value-conscious segments of the travel industry. The company is benefitting from an incredibly strong operating environment as the available supply of rental cars is near multi-year lows, while travel demand is seeing a cyclical recovery. As a result, Avis was one of the top performers for the month of October.

The holding that detracted the most from the Fund’s relative returns during the month was Snap, Inc. Class A (Ticker: SNAP). Snap, Inc. is a social camera and communications platform that generates revenue by selling advertisements. The company declined when it missed revenue estimates in the September quarter and guided below estimates for the December quarter of 2021. Snap revealed its advertising customers were pulling back on marketing spend due to supply chain constraints and Apple’s new IDFA limitations. The Manager expects theses transitory issues to negatively impact Snap for the next six to nine months so, it exited the position after the report.

VAM US Large Cap Growth Fund

Holdings in the consumer discretionary and materials sectors detracted from relative returns. Performance benefitted from holdings in the real estate and health care sectors. At month end, the Fund was overweight the real estate and materials sectors and underweight in the health care and consumer discretionary sectors.

The holding that detracted the most from the Fund’s relative returns during the month was Tesla Inc. (TSLA). Tesla, Inc. engages in the design, development, manufacture, and sale of fully electric vehicles, 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.

The holding that contributed the most to the Fund’s relative returns during the month was Coterra Energy Inc. (CTRA). Coterra Energy, Inc. engages in the development, exploitation, production and exploration of oil and natural gas properties. The company appreciated as it benefitted from positive revisions by the street due to positive results from industry peers.

VAM Emerging Markets Growth Fund

The VAM Funds (Lux) – Emerging Markets Growth Fund performance was aided by holdings in the materials and industrials sectors, as well as in Russia and the United States. Exposures to the consumer discretionary and communication services sectors, as well as Brazil and Uruguay, detracted from relative returns. At month end, the Fund was overweight Russia and underweight Brazil.

The holding that contributed the most to the Fund’s relative returns during the month was Contemporary Amperex Technology Co., Ltd. Class A (300750:CH). The company is China’s leading battery supplier. The stock outperformed in October as battery demand from the Electric Vehicle industry remained robust. Towards the end of the month, Contemporary Amperex reported its third quarter results, which showed better-than-expected gross margin. That provided comfort against concerns that profitability would be squeezed by rising battery material prices.

The holding that detracted the most from the Fund’s relative returns during the month was Alibaba Group Holding Ltd. (9988-HK). Alibaba’s share price bounced in October. The Fund is underweight versus the benchmark and, thus, the positive share price detracted from relative performance. Fundamentally, there were not any significant new developments in October. However, the shares are trading at a low headline valuation and are not as widely owned. The shares may be in the process of bottoming, especially considering the worst of the regulatory news has likely passed. The Fund has added exposure to peer companies of Alibaba that the Manager thinks are better positioned.

VAM World Growth Fund

The VAM Funds (Lux) – World Growth Fund performance was aided by exposures in the consumer discretionary and health care sectors, as well as in the United States and Germany. Exposures in the consumer staples and communication services sectors, as well as in Sweden and the Netherlands, detracted from relative returns. At month end, the Fund was overweight the United States and underweight Sweden.

The holding that contributed the most to the Fund’s relative returns during the month was Dutch Bros Inc. Class A (Ticker: BROS). Dutch Bros Inc. Class A is an operator and franchisor of drive-through shops serving unique customisable beverages. Dutch Bros completed an IPO in September and as awareness built for its attractive unit economics and growth opportunity, the stock appreciated meaningfully in October. After a significant move higher, the Manager trimmed the position.

The holding that detracted the most from the Fund’s relative returns during the month was Duckhorn Portfolio, Inc. (Ticker: NAPA). Duckhorn is a leading producer and globally recognised brand of mid to high end wines based in California’s Napa Valley. It has been benefitting for several quarters from strong growth, both in the US and globally, from increased spirits consumption during the pandemic and an aggressive marketing and sales campaign outside the US. After several strong quarters of growth, expectations were very high and in early October it reported disappointing fourth quarter results. Trends remain strong however, and the Manager continues to like the medium to longer-term outlook for the brand to continue to increase in awareness and penetration among wine enthusiasts and collectors

VAM International Opportunities Fund

Exposures to the consumer discretionary and industrials sectors, as well as in Sweden and the Netherlands, detracted from relative returns. Performance was aided by holdings in the health care and information technology sectors, as well as in Japan and France. At month end, the Fund was overweight the Netherlands and underweight Japan.

The holding that detracted the most from the Fund’s relative returns during the month was ZOZO, Inc. (3092-JP). ZOZO is a leading Japanese-based, online fashion shopping retailer. It has been benefitting from increased online shopping and ecommerce adoption during the pandemic over the past one to two years. This was not a thesis for owning per se, but it certainly helps accelerate adoption. And growth comparisons now get increasingly difficult given the high base effect of the past few quarters growth rates will invariably slow, at least optically. It recently reported second quarter results that disappointed relative to very high expectations and the stock reacted negatively in the short term. The Manager continues to believe in the medium to longer-term growth runway and maintains a small position while the volatility will, hopefully, be short-lived.

The holding that contributed the most to the Fund’s relative returns during the month was VERBIO Vereinigte BioEnergie AG (VBK-DE). VERBIO is a German-based leading player in the biodiesel and bioethanol fuels market. If the 2020’s are the decade of decarbonisation and continued acceleration in green and clean energy solutions, its proprietary solution that turns toxic raw ingredients into clean biofuels puts it in a sweet spot to benefit from these trends, particularly, in the truck, fleet and transportation markets. In addition to these manufacturing solutions, it is able to sell greenhouse gas emission reduction credits through its sale of biofuels, so, it has multiple revenue and margin drivers to benefit from the accelerating clean energy trend. Over the past two years, it has been bolstering its product offering and sales footprint now in the midst of a major global expansion throughout Europe, the US, and now accelerating in China and Asia. It is too early in the industry’s development to know just how large the ultimate addressable market will be, but the Manager strongly believes it is in the early innings of a multiyear growth runway. In late September, it reported better-than-expected results for the fourth quarter and raised guidance for 2022 on stronger demand trends.

VAM Global Infrastructure Fund

Performance was primarily driven by the Fund’s renewable energy holdings, which have returned to form after a weak start to the year. Notable performers include Encavis in Germany (+19.20%) and NextEnergy Partners in the US (14.52%). Renewable energy remains a conviction allocation with the portfolio, with the Manager seeking to select companies that have the skillset and expertise to provide clean energy solutions, demand for which is as strong as ever. The “real” infrastructure nature of the Fund’s investment strategy means that renewable energy holdings are typically the long-term owners of assets, seeking to generate forecastable and reliable cash flows. These companies are an important facet of the clean energy transition and are expected to replace the carbon intense power producers that have gone before them, making them a suitable and attractive long-term allocation for the Fund. Valuation discipline within the sector remains a focus and the management team is carefully monitoring share price performance in the context of underlying asset values and earnings strength.

Transactional activity in the renewable energy segment continues at a pace. Greencoat Renewables completed a €165m share placing, of which Foresight participated, and a subsequent acquisition of a 101MW wind farm in Sweden. In North America, portfolio holding Innergex completed the acquisition of a 60-MW run-of-river hydroelectric portfolio in New York for $318.4 million, alongside an investment partner. The assets benefit from a power purchase agreement (“PPA”), providing Innergex with multi-year contracted cash flows.

In the core infrastructure sector, BBGI Global Infrastructure announced the acquisition of a 25% interest in Centre Hospitalier de l’Université de Montréal, in Québec, Canada for a purchase price of CAD88m. The asset is an operational hospital facility and has 772 private patient rooms, 39 operating theatres and 415 examination rooms. The facility services over 1.7m people in the province and is one of the largest health care facilities in North America. The investment is structured as an availability-based publicprivate partnership project, providing a consistent and secure income stream from a high-quality counterparty and comes with a concession that runs until 2050.

Whilst the renewable energy sector remains the largest allocation for the Fund’s portfolio, the portfolio remains diversified across various parts of the sustainable infrastructure market. Recent additions in core infrastructure and health care have added further diversification and contributed towards the lower volatility the Fund has recently demonstrated.

The outlook for the Fund is favourable with the incentivisation of private capital to deliver public infrastructure projects proving a consistent theme in developed market economic development plans. The decarbonisation agenda is a major tailwind to the strategy with governments and corporates demanding more renewable energy projects and assets that make up the opportunity set for many of the Fund’s investments.

*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 October 2021. 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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