Vermeer World View

Putting You In The Picture - January 2022

6th January 2022

2021 turned out to be another very strong year for the global equity market, led by stellar returns from the US and taking global equities to a return for the year of 23%. The Vermeer Global Fund also posted another solid year of growth, rising by over 16%. This was somewhat disappointing in the context of the benchmark, but nonetheless a healthy absolute return, generated by the solid performance of many of our companies successfully navigating their way through the considerable challenges of the COVID-19 pandemic.

It has been nearly two years since COVID began to take a dominant hold on all of our macro-economic thinking on which we base our portfolio construction. As we head into 2022, we still see no reason to alter this viewpoint. The performance of our portfolio is likely to be dictated by the speed at which the world can get to a new normal and how economic performance will be dictated by inflation, ongoing supply chain dislocation and the central bank policy responses that follow these issues.

Once again, US equities dominated global equity market performance as the S&P 500 posted a remarkable gain of over 28% that followed the rise of 18% in 2020 and more than doubling the index over a three-year period. The Stoxx 600 in Europe also posted a very healthy gain of nearly 26% in local currency. Japanese equities had a disappointing year comparably, with the Topix rising by just under 13%, whilst in the UK the FTSE 100 rose by around 18%. Despite the weak relative performances of the UK and Japan, a number of individual companies posted very strong returns. In Japan, Sony and Toyota both returned over 35% with Shimano and Keyence rising by over 25% in local currency and in the UK, BP, Oxford Instruments and Treatt all had excellent years, rising by 36%, 33% and 57% respectively. With respect to currency, although it was another volatile year for Sterling, over the twelve-month period it was little changed versus the Dollar, whilst the weakness of the Yen did have a significant negative impact on Fund performance as we remain strongly committed to our overweight stance to the Japanese market.

US equities were once again led higher by the strong performance of the mega cap technology names. Microsoft has long been the largest position in our portfolio and once again delivered an excellent performance, rising by over 52%, a move justified by the consistently excellent quarterly results announced by the company. It was also a great year for Apple and Alphabet, whilst Amazon’s performance was far more muted, as the company continued to invest a colossal amount of capital into future development. This was a decision that led us to increase our investment in the company in the final few months of 2021. We initiated a position in Nvidia in April 2021, which performed very well and despite being very expensive, remains very well positioned for the future. Oracle became a top ten position in our portfolio and delivered great results in December, sending shares materially higher, only to give back all their gains following the announcement of a deal to acquire healthcare IT solutions company Cerner for $30billion in cash. Oracle’s successful drive into the cloud for enterprises is set to accelerate top line growth materially in the coming years, which we ultimately believe will continue to drive a re-rating in the stock. Oracle shares continue to trade at a material discount to cloud software peers and is also supported by a progressive dividend policy and an aggressive share buyback plan.

We have already noted some of the strong performances that led our portfolio in 2021, which included Apple, Microsoft and Nvidia, and there were many other notable performances, including ASML. Shares in ASML, the worlds leading lithography machine manufacturer for the semi-conductor industry, rose just under 80% in 2021 as it saw demand surge for its equipment, enabling the company to forecast double digit top line growth as far out as 2030. ASML is a notable winner from the accelerated digital transformation that has occurred post the COVID-19 outbreak and is also a beneficiary of the notable reshoring that is taking place in the technology industry.

Evoqua Water Technologies had a very strong year, rising by 73% as it delivered consistent results and saw its shares materially re-rate. Performance has been helped by a combination of demand for infrastructure related investment following the passage of the widely anticipated $1trillion infrastructure bill in the US and continued investor drive into ESG related investments that has seen the water sector significantly re-rate over the last few years. Evoqua now has a market capitalisation of $5.6billion so remains relatively small but has the scope to grow strongly, helped by industry tailwinds and via acquisition. This was highlighted by its recent acquisition of Mar Cor Purification, a leading manufacturer and servicer of medical water, commercial and industrial solutions in the US and Canada, which generates $180million of revenue and $27million of EBITDA and will cost Evoqua $196million to acquire.

Novo Nordisk has been part of our healthcare portfolio for several years and performed well in 2021, rising by over 75% as demand for diabetic and obesity products continues to grow strongly. The initial performance of Wegovy, Novo’s new obesity product that it launched in the latter half of 2021 helped the shares post very strong gains and it was therefore no surprise when the stock tumbled 13% in one day in early December when the company was forced to announce manufacturing delays caused by a third-party provider which will slow the pace of growth for the product in the short term. The stock price did regather its poise into the year end to finish higher for the month of December. Novo has also enjoyed strong tailwinds from its diabetes franchise and the possibility that it may have a product that could help with the treatment of Alzheimer’s. Novo has materially outperformed the struggling pharma sector in recent years, and we will be keeping a close eye on developments for Wegovy in the coming months as this product is perceived as pivotal to the performance of the company in the near term.

Disney shares had a difficult year. After peaking in early 2021 at above $200, the stock price fell back to just above $150 as the Disney+ streaming service saw subscriber growth slow and the pace of the reopening for the Parks division and cinemas continued to be impeded by the COVID pandemic. The recent release of the latest Spiderman movie, which is co-owned by both Disney and Sony, once again highlighted the incredible value of great content that has been consistently generated from the performance of Marvel, Lucas Films and Pixar, all acquired by Disney for a total combined value of just $15billion and complementary to the original Disney franchise. Whilst it remains unclear as to the trajectory of near-term subscriber growth for Disney+, or the pace of reopening for Parks and cinemas and indeed for the continued high cost of acquiring sports rights, which could all lead to further earnings volatility, we continue to see Disney as a materially undervalued asset. We believe that should Disney shares continue to struggle in the coming months, this may attract the attention of deep pocketed mega cap companies who are trying to build content platforms and could correctly identify Disney as a one-off opportunity to create a step change in trajectory.

Nihon M&A Center had a notably poor year, capped off in December by the announcement of revenue recognition issues which saw shares tumble; we subsequently reduced the size of our position. We still believe that Nihon represents a very exciting way to play the longterm structural growth theme of smaller family-owned companies without a succession plan in Japan being acquired as part of an ongoing industry consolidation. However, we prefer to run with a smaller position whilst these accounting issues are resolved and will take a more proactive decision once a clearer picture emerges. Nihon shares declined by 18% in 2021 having been one of the best performing stocks in our portfolio in 2020 and since our original investment in late 2016.

Ocado had a tough year in share price terms in 2021 but continues to develop strongly as a company as it expands the number of global customer fulfilment centres and strengthens ties with a number of global food retail companies. Ocado shares declined 26% in 2021 but are still materially higher than where they began 2020 and before the outbreak of COVID. In the latter part of the year investors became fixated on a legal patent dispute between Ocado and AutoStore. In December, a US judge ruled that three AutoStore patents were invalid and that Ocado does not infringe on a fourth. Although this case is ongoing and could still provide a significant investment hurdle, we believe that the confidence companies like Kroger, a major US food retailer and an excellent company which is pursing a substantial online development programme, are showing in Ocado highlights the opportunity that the company has in global robotics logistics for retail. In Ocado Retail in the UK, its joint venture partnership with Marks & Spencer, is performing well but is currently suffering from capacity constraints which should ease in 2022 as new customer fulfilment centres come online. We also believe that M&S may buy Ocado out of the existing JV, releasing substantial capital for Ocado to invest and allowing it to concentrate on the global rollout into more territories as the world continues to transition to a higher level of online food retailing.

Zimmer Biomet shares lost ground in 2021 as COVID-19 continued to materially impact the trajectory of recovery in elective surgeries, leading to a disappointing year for earnings growth. The company continues to execute its strategy well but needs to see a reduction in COVID related hospitalisations to regain momentum. Whilst it is too early to be confident regarding the ongoing developments related to the pandemic, we are hopeful that the latest highly virulent but potentially less dangerous Omicron strain will accelerate the pace at which elective surgery can recover. A move back to its structural growth path along with a potential surge in demand over the next few years as the industry tries to catch up on the backlog of procedures that have not been able to occur over the last two years will also help drive a recovery in the shares.

Outlook for 2022

We anticipate that the stellar performance from equities of 2020 and 2021 will not likely be repeated but that global markets will still be able to post gains despite considerable headwinds and uncertainties. The Federal Reserve is planning to reduce liquidity via tapering and attempt to begin the process of normalising interest rates with three rate hikes now forecast for 2022 and 2023. Inflation is going to be carefully watched in 2022. Monetary authorities initially believed that the rise in inflation seen since the middle of 2021 would prove to be transitory, but it has in fact turned out to be far stickier than they initially anticipated. The rate of inflation has been exacerbated by a combination of a tight labour market and supply chain issues which have caused significant industry dislocation. The latest FOMC meeting minutes released in early January clearly highlighted a change in stance from the Fed, which now acknowledges that inflation issues need to be tackled more aggressively.

The performance of the US Treasury market will continue to be pivotal to the market’s performance and framing whether a growth or value style are in vogue. We are running with a continued balance in our portfolio, reflecting opportunities we see in all parts of the market, whether it be the continued strength of high-quality growth companies that keep delivering, value stocks such as oils and banks, which look extremely cheap, as well as “reopening” trades like Disney and Zimmer. As mentioned earlier, both these stocks struggled in 2021 and would be real beneficiaries of a more normal economic environment which we certainly hope will be the case if the spread of the Omicron variant does not lead to a significant increase in the rate of hospitalisations.

Despite the disappointing performance of Japanese equities and the Yen in 2021, we remain optimistic about the prospects for this market in 2022 and are still looking to add to our existing overweight position. Within our eight-stock portfolio we have a balance between long term structural growth companies like Keyence, Shimano and Obic, combined with the deep value opportunity in Toyota and the recently added position in Olympus. Olympus has been the beneficiary of an activist investor and in December announced another value creating portfolio transition with the planned sale of another non-core division allowing the company to continue to focus on its world leading position in the endoscopy market. We agree with management’s assessment that they are only partially through their transition and see the opportunity for strong revenue growth and significant margin expansion. We see Olympus as a typical example of the opportunities in Japan as activism is an increasing theme for value creation in a market containing many undervalued companies and will be a beneficiary of Asian economic reopening in a more normalised environment.

Overall, we are cautiously optimistic for the year ahead and believe there to be many individual company opportunities to create value even if overall index level performance is materially more muted than in the last few years.

Disclaimer: Further information about Vermeer UCITS ICAV including the current Prospectus and Key Investment Information Documents (“KIIDs”) can be found at Past performance may not be a reliable guide to future performance. Investments can go down as well as up and therefore the return on investment will necessarily be variable. Income may fluctuate in accordance with market conditions and taxation arrangements. Changes in exchange rates may have an adverse effect on the value, price or income of the product. Vermeer Investment Management Limited is authorised and regulated by the Financial Conduct Authority (Financial Register Number 710280) and is incorporated in the United Kingdom (Company Number 09081916). Registered Office Address: 130 Jermyn Street, London, SW1Y 4UR. Vermeer UCITS ICAV (“the Fund”) is registered with the Central Bank of Ireland as an open-ended umbrella-type Irish collective asset management vehicle with variable capital (Register Number C154687). Opinions expressed whether specifically or in general or both on the performance of individual securities and in a wider economic context represent our view at the time of preparation. They are subject to change and should not be interpreted as investment advice. This document is intended for use by shareholders of the Fund, persons who are authorised to carry out investment business, professional investors and those who are permitted to receive such information. Nothing in this document should be construed as giving investment advice or any offer, invitation or recommendation to subscribe to the Fund. Any decision to subscribe should be based on the Fund's current Prospectus and KIIDs.