FundInfo



Fund Manager
Paras Anand
Fund Manager Commentary
	July was a better month for investors with most indices posting positive gains; whilst it is arguably of limited benefit to rationalise every small oscillation in markets, the scale of this months’ move (HSBC Smaller European Companies ex-UK + 6.8%) definitely warrants some comment. What we have been seeing over the early part of the year has been a two-way pull between concerns over the fragility of the economic recovery in developed markets and the relatively robust earnings being reported by the corporate sector. July is the month where many companies start to indicate how they have performed in the first half of the year; that many companies continued to perform ahead of expectations acted to spur the markets on. Financial companies in particular were buoyed both by strong operating results and by early indications that discussions on regulation would be constructive (which is sensible) rather than penal (reactive and unhelpful). The company’s Net Asset Value rose over the month by +4.8% in Sterling terms, with strong gains from some of our financial holdings. Azimut, the Italian investment management group gained +14.4%, BME, the Spanish stock exchange operator rose +12.3% and Partners Group added +11%. The fund was negatively impacted by falls in STS Ansaldo, ( -7.6%) and EFG International (-6.8%); we took the opportunity in both cases to add to our holdings. Our share price rose by +3.5%, the discount to NAV widening slightly to -10.5%. The stock for discussion this month is ASM International. We typically divide our holdings into four categories – Durable Franchises, Wide Moat Growth, Transformation and Deep Value. ASM fits into the Transformation category as part of the manufacturing base is relocating to Singapore and the corporate culture appears to be changing for the better. ASM comprises two main parts: a 53% stake in Hong Kong listed ASMPT, which sells tools used in the ‘back-end’ of the semiconductor chip manufacturing process and is highly profitable, and a ‘front-end’ business that has been loss-making and consuming the ample cash flow generated by ASMPT. Given this position, the market has seen fit to ascribe a negative value to the ‘front-end’ business such that the market capitalisation of ASM is less than the value of its stake in ASMPT. There are, however, attractive parts within the ‘front-end’ business of ASM evidenced by the fact that in June 2008 Applied Materials offered to buy two of the product lines for $400-500m. Management fought off the attempted break-up but agreed to make the front-end self financing and cash flow from ASMPT was to be used only to pay down debt or be returned to shareholders. In 2009 the PERFORM! programme was introduced to address the cost base in the ‘front-end’ businesses in order to achieve good profitability through the cycle on lower working capital. The latest results show good progress towards this goal with the ‘front-end’ orders up +153% Y-o-Y and operating margins of 13%. It feels incongruous therefore that ASM is still valued at over €400m less than the value of its stake in ASMPT. There are clear concerns that the semiconductor cycle will turn after a solid recovery, but ASMPT is benefiting from the longer term growth in LED usage, and the ‘front-end’ business is supplying tools that the industry will need to produce the next generation of semiconductor chips. Cyclicality aside, both businesses in ASM should generate good returns over the cycle; that the ‘front-end’ has not done so historically, is a result of poor management. (As at 31 July 2010)

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