WHAT COMPANIES TOLD US IN JANUARY 2019

January is always a fantastic time to meet with companies before they go into their “quiet period” ahead of Full Year results. This January has been no exception and we, as an investment team, have seen some 210 companies. What follows is a tour of the current received wisdom regarding European markets with some interesting “soundbites” we have picked up, which in turn affect our current thinking…

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WHY EUROPE? MYTHS VS REALITY

Once again negative flows from European equities have hit the headlines. With Bloomberg reporting that: global investors have pulled $56bn from European equities this year, an exodus so sharp that it’s reminiscent of the euro-area debt crisis in 2011-2012.

In the attached piece, debunking the myths and misconceptions we so often are presented with, we show why the underlying health of the European economy and the outlook for equities couldn’t be more different than these headlines suggest. Indeed, considering the region’s robust growth and attractive valuations, we think it is the perfect time for many investors to take a closer look at Europe.

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GOING OFF-ROAD IN EMERGING EUROPE

Russia is the largest market in almost all ways in Eastern Europe. Whether by GDP, population size, or total market capitalization, it comfortably eclipses the other Emerging European markets.

Despite this, the addressable equity market for us is much more limited…

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IN THIS BRIGHT FUTURE, YOU CANT FORGET YOUR PAST

November 2017 marks the tenth anniversary of the launch of the S. W. Mitchell Small Cap long‑short strategy and strikes me as an opportune moment to look back on what we have managed to achieve for our investors, what we have learnt along the way and what we anticipate and target in the next decade.

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MISAPPREHENSION

Identifying and investing in undervalued franchises is core to our investment approach. Our investment team’s hundreds of annual company meetings, combined with a long-term investment horizon, help to cut out distracting market noise. This lack of short-termism, and frequent catch-ups with the management of the companies that we invest in, allows us to evolve our thesis on a stock as we gather new information. SAP is a prime example of our approach.

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MAKING SENSE OF 3D SENSING

Over the last few years, global smartphone adoption has surged to more than 2.5 billion users, and is on a clear path to double again. However, the pace of radical innovation appears to have stalled: Apple has only introduced marginal improvements to its iPhone 6 design over the last three years. This suggests one of two things: either that this beacon of innovation has run out of ideas; or maybe that it is working on something truly revolutionary. We believe it is the latter, and that Augmented Reality (AR), enabled by 3D sensing, will be the blockbuster new feature that will be introduced this Autumn as part of the iPhone 8, to mark the tenth anniversary of Apple’s original iPhone.

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SIGNALS AND NOISE. WHAT DID AND DIDN’T HAPPEN IN 2016

Of course, we are now only at “the end of the beginning”. There remain many Brexit-related developments to watch in the coming months and years – not the least the drama of a UK snap election in early June of 2017. Nevertheless, we feel now is an appropriate time to reflect on the aftermath of the referendum. What did the companies we talk to, and invest in, see in the weeks and months after the vote – was it what was feared beforehand? What investment lessons can be learned from 2016? And what is now the best strategy for investing in the UK as it embarks on its divorce from the European Union?

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WHAT WE LEARNT AT THE CLINIC…

Tragically, the lives of most of us have been touched by cancer and the battle to treat cancer has been ongoing for many years with varying degrees of success. The ubiquity of this disease led us to a Swedish organisation, Elekta. For the last twenty years this company has been the pre‑eminent designer and producer of linear accelerators (LINACs), the machines that are used to administer radiotherapy. The company’s commitment to R&D was impressive, and implied that it was always going to be a major player in what is, sadly, a growth industry. Whilst this excited us we were never able to get comfortable with their accounting policies and this deterred us from making an investment.

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