After a year marked by top-down factors (war in Ukraine, oil and commodity prices, inflation, interest rates, etc.), the first half of 2023 has seen a return to normal and a focus on the fundamentals. Against this backdrop, EDM Strategy has shown excellent performance in the first half of the year with gains of +19.9%, significantly outperforming the MSCI Europe NR index, which is up +11.1%.
EDM Strategy has a clearly defined style: invest in quality companies, global sector leaders, with visibility, a high profitable growth and strong balance sheets. As a result, we know that at times the fund may lag the market. This is what happened in 2022, a year marked by the war in Ukraine, rising oil prices and the exceptionally positive performance of the energy sector in a market with sharp corrections across the board. At EDM Strategy, we are taking advantage of the decoupling between prices and business performance to optimise the portfolio by investing in high quality companies at very attractive prices, thus laying the foundations for excellent future returns for our unitholders. We understood this gap between prices and fundamentals would eventually close. And that is what happened in this first half of the year, where all investors that, like EDM, stood firm in their convictions and saw the corrections as a historic investment opportunity have been rewarded with strong gains.
This way of investing, without deviating from our style, has allowed us, for example, to avoid the banking crisis that occurred in March of this year with the collapse of Silicon Valley Bank and the bailout of Credit Suisse in Europe. Investors began 2022 with a very positive view of the banking sector, in theory one of the greatest beneficiaries of interest rate hikes. At EDM Strategy, we did not get carried away by this positive momentum. The market focused on the interest rate argument, neglecting — as is usually the case in times of optimism — the complexity of the sector and underestimating its risks. This is not to say that an investor cannot make money at any given time by investing in banks. We simply believe that there are many other companies that offer equal or greater potential at much lower risk. And looking at the worst long-term performance of the banking sector, history shows that this higher risk does not pay off.
Although we are not currently invested in banks or energy, we also do not want to be labelled as “fundamentalists”. EDM Strategy’s objective is to have a balanced portfolio that can outperform the market regardless of the economic environment. We have companies in our portfolios that are in industries such as chemicals and building materials, which are highly dependent on the economic cycle.
Looking outside the box, as we like to say, we have also found companies in these sectors that meet our criteria and have been major contributors to the fund’s performance. For example, 6% of the portfolio is in the building materials sector. Given the general view of this sector — apparently cyclical, with high operating leverage and demand-sensitive pricing —, it may seem difficult to understand our exposure to it. However, we believe that the characteristics of CRH and SIKA, the two companies we have in the portfolio, make them resilient to the current cycle, with exposure to trends that ensure medium- to long-term growth thanks to the IRA, the IIJA, the EU Green Deal and the onshoring movement. They are companies with attractive structural growth, high pricing power, healthy balance sheets and characterised by an efficient capital allocation policy.
We know that with our strict investment criteria we will miss some opportunities. However, experience has taught us that it is not only crucial to get the stock picking right, but also to avoid the big mistakes. And one way to do that is to focus on what we know well and to have a portfolio of high convictions.
In short, we believe that a vehicle such as EDM Strategy offers our unitholders the opportunity to achieve excellent long-term returns with manageable risk.
Beatriz Lopez and José Francisco Ruiz,
co-managers EDM Strategy fund
