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Monthly Report 12/2023

By January 10, 2024No Comments

The KEN European Growth Champions Fund achieved a performance of +6.21% in December. The average net exposure stood at 62.11%, with the long positions gaining +8.47% and the short positions incurring a cost of -1.22%.

Market Review: December witnessed strong performance in the stock market, fueled by the anticipation of a decline in interest rates throughout 2024. The DAX rose by +3.3%, MDAX by +3.6%, and TecDAX by +4.2%. The economic discussion revolved around the delicate balance between economic growth and inflation, with the oil price maintaining a constructive level between USD 70 and 80, conducive to economic growth.

Portfolio Review: In the last month of the year, we benefited again from the recovery of real estate investments such as Vonovia (+12.35%), LEG (+13.61%), and Deutsche Pfandbriefbank (+10.15%). The travel company Tui also continued its recovery with a gain of +27.36%. The short positions did not provide support in this environment.

Investment Decisions: Towards the end of the month, we increased our short positions, with the average net exposure standing at 62% throughout the month. As December came to a close and the new year began, the “higher-for-longer” theme gained popularity, suggesting that potential interest rate cuts had been overly priced in. A correction seemed imminent.

Year in Review: Our long positions achieved a gross performance of +23.6% in 2023, benefiting from a robust overall market. We generated alpha compared to SMI (+3.8%), MDAX (+8.0%), TecDax (+14.0%), and SDAX (+17.1%) as well as in the short book, which achieved a gross performance of +2.6%. Particularly in challenging market months like March, August, September, and October, the short portfolio contributed a total of 12.4% to performance. The top 10 underperformers in the fund cost us -17.39%, while the top 10 contributors collectively added +30.19% to gross performance. Individual stock selection, weighting, and risk management played crucial roles. The most significant loss position was Embracer, resulting from an unexpected profit warning. Communication with management at a previous meeting had provided contrary indications.

On another note, positions in LEG and Vonovia were more stable, contributing strongly to the long side for many months throughout 2023 as we have mentioned earlier in previous fact sheets. We purchased these stocks at low levels, anticipating a potential interest rate trend reversal.

Both companies also exhibited a) decent price upside based on valuation key indicators like P/B, dividend yield, and FFO yield, b) a secure balance sheet relative to peers in the same sector, and c) positive macro prospects for the whole sector due to our conviction in the upcoming interest rate trend reversal. Together, both companies contributed well over 5% to the long side of the portfolio.

In hindsight, it became evident that we had prematurely anticipated an interest rate turnaround, resulting in a performance hit in late summer and early fall (Aug-Oct). We stuck to our conviction. In November, when weak labor market data and declining inflation expectations pushed down interest rate forecasts, we regained all performance. Many of our stocks reflected this with strong momentum, and the fund closed the year with a gain of +17.21%.

Outlook: Currently, we envision a scenario where interest rates in Europe and the US have peaked. For 2024, we believe in at least three interest rate cuts in the US, as announced by FED President Jerome Powell in December. We also anticipate declining interest rates in Europe throughout the year. These measures should stimulate the stock market, particularly in the small and midcap sectors. We expect the unclear timing of any interest rate cuts to become a recurring theme leading to volatility events this year.

The three-year-long underperformance of small and midcaps compared to large caps is likely to ease in a declining interest rate environment. We see good prospects for our long/short strategy in 2024 as small and midcaps gain more focus on highly attractive valuation levels.