Vermeer Monthly – August 2024
Global equities were very volatile in July but ended the month broadly unchanged. However, that disguised a significant rotation away from the technology sector and into other areas of the market that have struggled for a lot of 2024. The Vermeer Global Fund declined around 1% in the month but remains just under 14% higher year to date.
The Federal Reserve once again left US interest rates unchanged at the end of the month but cleared the path for the first cut in rates in September. However, weaker economic data after the end of the month in the form of a poor manufacturing ISM number and a softer than anticipated July jobs report that highlighted fewer jobs being created and a 0.2% increase in the unemployment rate have significantly increased the expected pace of rate cuts.
At the same time as the US is beginning a new rate cutting cycle, the Bank of Japan decided to raise interest rates on the last day of July to “around” 0.25%. Inevitably, this has led to a major negative market reaction. In the period of time since the Yen bottomed around 10th July, the Yen has now strengthened by over 11% against the US Dollar with the Nikkei declining by nearly 25% in the same period, including its largest one day decline since 1987.
The so-called Yen “carry trade” has been one of the most enduring and successful trades for global investors for a long period of time. We are clearly seeing a material unwind of this trade. While we expected some unintended consequences of this unwind, it has been much faster and much more severe than we anticipated. We have been holding higher than normal levels of cash due to this uncertainty with the Fund’s cash balance ending the month at around 8.5%. While we do not know how long it may take for markets to settle down, we remain positive on the fundamental investment thesis for Japan and are monitoring the market with an eye to putting some of this cash to work.
UPS shares had very disappointing results and the shares fell heavily on the day despite having already been a poor performer so far this year. Our thesis for owning the stock has been that the company would have a much better later half of 2024 having suffered in 2023 due to prolonged union wage negotiations, which not only put pressure on costs but saw the company lose volumes due to the threat of industrial action. We believed that as volumes returned and the first year of higher costs rolled off, the business was set for improving performance. Although this has worked to a degree and volumes have started to improve, investors are worried about the negative mix impact on margins from recent new business wins in the e-commerce sector in the US. This has led to downgrades in earnings expectations and a further derating of the stock. We are currently reviewing our position, but the shares do now have considerable yield support and a strong financial position from which to
rebuild confidence in 2025.
The major global IT outage on 19th July that led to considerable disruption across many industries for several days hit shares in cybersecurity company CrowdStrike very hard. Alongside CrowdStrike, Microsoft’s products were at the very centre of the outage, although appeared able to restore most of its operations reasonably quickly. In July, Microsoft shares fell by 6.4% despite another excellent set of results, which showed revenues growing by 15%, but also a significant ongoing ramp up of capital expenditure to fund future growth in AI data centres. Microsoft remains the largest position in the Fund although we did modestly reduce our position in July.
We were relieved to see our one position in the cybersecurity space Varonis Systems produce another strong set of results which saw shares rally 14% on the day of its earnings. Varonis has been transitioning to a subscription based business model, which it appears to be executing well and we are excited about the tie up with Microsoft CoPilot, which we hope will generate significant revenues in future years.
We recently added a position in Thermo Fisher Scientific to the portfolio. Thermo is one of the world’s leading companies in the medical technology sector and we have been building up our position in the stock after it produced a solid set of results during the month. Thermo is a business that we have long admired by never previously owned, but we believed that after a period of prolonged weakness in the shares, we should take our opportunity to invest. Thermo has executed well in a difficult environment and after a period of negative revenue growth, we see the company having a materially better set up heading into 2025 and beyond.
Davide Campari produced another solid set of results in what has proved to be a very difficult sector this year. Campari continues to show strong execution for its leading brands in aperitifs, tequila and brown spirits. The global alcoholic beverage industry has been going through a major reset of expectations in the post COVID era which has led to an extended period of inventory reduction amid a myriad of questions on drinking preferences of young adults and the potential impact on consumption from GLP-1 weight loss drugs. Campari shares have been materially derated in the last year, but we remain supporters of the company which has a strong record on brand development, notably Aperol, and timely acquisitions. We believe that the recently acquired cognac brand Courvoisier for $1.2billion at what may prove to be close to the bottom of the cycle for cognac will once again prove the quality of the company’s strategic thinking.
We have added to our position in Unilever following a much improved set of results this quarter. New management is showing positive signs of executing a clear strategy to reduce poorly performing brands and focus on higher growth areas of the portfolio. The company plans to spin off or sell its ice cream business and has already announced several disposals, which we expect to accelerate and see the company focusing more on its beauty and household brands segments and less on food, despite both Knorr and Hellman’s continuing to perform well. We believe this could lead to Unilever growing materially faster than its current forecast of 3-5% and would free up capital to make further acquisitions in faster growth areas and returning more of this capital to shareholders. Unilever shares are up around 28% this year but have still materially underperformed over the last five years and are only just above where they traded following the unsuccessful bid by Kraft Heinz back in February 2017.
As noted earlier, we are maintaining a relatively higher weighting in cash, which currently sits at around 8.5%. This is slightly lower than a month ago which reflects some rebalancing in the portfolio, notably in what we consider to be more defensive areas of the market. This includes healthcare where we have further reduced our exposure to the weight loss GLP-1 sector and have added to several other names such as Roche, Sanofi, UnitedHealth and Zimmer Biomet.
As we move towards the uncertainty around the US elections and the impact of the unwind of the Yen carry trade, we intend to retain a higher than normal level of cash, having run fully invested for most of the year. Despite our near term caution, we are finding many new opportunities to invest in and are taking the opportunity to add to existing positions that have struggled to perform despite producing satisfactory results.
Tim Gregory
Senior Fund Manager
Vermeer Investment Management