After a 2020 defined by the COVID pandemic and the subsequent economic downturn, in 2021 we return to normal. Thanks to a blisteringly fast vaccination rollout (mainly in developed countries), the recovery is now a reality and concerns are emerging about whether inflation will last longer than expected and when the central banks will begin to withdraw monetary stimulus.
Markets are rewarding this recovery and, in an environment of prolonged low interest rates and a sharp rebound in corporate profits, equities are once again the victor.
With one quarter left until year-end, we can describe the profitability of EDM’s main funds as outstanding. We achieved this feat by staying true to our management style, which we call “common sense investing,” an approach that has provided us with such good results over the long term. We select quality companies based on their fundamentals, companies that are industry leaders, with competitive advantages and good management teams. We look for business visibility, healthy balance sheets, profit growth, and high cash generation. These are typically companies that thrive in environments with some inflation (like the current climate) because they have the capacity to set prices and transfer the increased cost to their products.
Another important feature of our style is a penchant for long-term investment. Our analysis is based on five-year forecasts and we avoid any short-term perspectives. As such, portfolio rotation is kept to a minimum. We also apply ESG criteria consistent with our internal sustainability policy. The last step concerns valuations: we only invest when valuations are attractive.
The performance of the EDM Strategy Fund R, with a return of +18.5% at the September close, far exceeds that of its benchmark, the MSCI Europe (+14%). The fund is ranked among the highest in the European equity category thanks to a balanced, flexible portfolio. Successful stock picking is crucial in an environment that offers good opportunities for active management. Among the top contributors to the fund’s profitability is the Dutch company ASML, which manufactures the components that produce semiconductors. The company is profiting from the heavy demand for chips and certain megatrends (5G, AI, Internet of Things, etc.). In addition, strong cash flow has allowed it to announce a share buyback programme. Following ASML are two companies in the ‘asset light’ logistics sector, DSV and Deutsche Post, which have not only benefitted from the sharp growth of ecommerce, but have also managed to gain market share. Other standouts include several pharmaceutical and luxury companies.
In the first nine months of the year, EDM Inversión FI-R obtained a return of +11.4%, outperforming the Ibex-35 selective index (+8.9%). The companies in the portfolio are largely exporters; only one-third of the portfolio’s sales occur in Spain, and many are global leaders in their sectors. Laboratorios Rovi is one of the main contributors to the portfolio’s profitability. The family-owned pharma company increased growth forecasts given its manufacture of Moderna’s COVID vaccine and the growth of its heparin business. Fluidra, a global leader in swimming pools, has had an outstanding year, buoyed by very strong business fundamentals (for new and aftermarket products), as well as the recovery of commercial pools after a dismal 2020. Finally, we highlight Inditex, whose online platform maintains healthy growth, having moved up by one year its target to account for 25% of sales. Also space optimisation and operating improvements have pushed cash generation to record highs.
Our North American equity fund, EDM American Growth R, closed September with a cumulative return of +18.5%, outpacing the S&P 500 (+14.7%) and securing the top spot in its category. The portfolio consists of 22 high quality companies with sustainable growth and competitive advantages. Nvidia, Snap, and Intuit, which have appreciated considerably, are the main contributors to the fund’s performance this year.
EDM Ahorro FI-R, which invests in bonds, closed the first nine months of 2021 with a return of +1.5%, beating its benchmark, the Euro Broad Market 1-3Y index (-0.3%), and leading the euro fixed-income category this year. The environment has been defined by low (often negative) interest rates, some steepening of the sovereign bond curve, and the narrowing of corporate spreads. The fund’s flexibility in terms of strategy has been key to its favourable evolution thus far in 2021. The portfolio maintains a degree of exposure to inflation-linked sovereign debt (and has benefitted from the recent spike in inflation) with a duration of less than two years and strong diversification in corporate bonds that provide value for the portfolio.
Current equity fund valuations remain very attractive and below their historical averages despite excellent returns this year. We anticipate average annual growth in aggregate portfolio earnings to exceed 10% for the next five years and expect the rate of return to exceed that growth. Among bonds, the fund will continue to benefit from the flexibility of its investment strategy.