Interview with Jean Louis Delhay, Directeur Gestion Diversifiée at Crédit Mutuel Asset Management and Jean Luc Ménard, fund managers
Why invest in this fund?
CM-AM Convictions Euro is a SRI labellised fund. Its main objective is to support the long term development of high quality growth companies that create value and therefore generate performance for fund shareholders.
This strategy offers an attractive solution for investors wishing to invest in Eurozone equity markets, since the fund selects for them the best companies in the three market segments: Small, mid and large caps (the latter representing at least 50% of the assets). This all cap approach also allows the investment team to gain a good understanding of the value chains and ecosystems in the various industries, as well as key long term trends.
This PEA eligible fund invests across the market capitalisation spectrum and across a wide range of business sectors. The management team implements a flexible strategy and for the core of the portfolio integrates a selection of companies well positioned on major structural trends, and also in diversification a selection of quality securities with a lower valuation.
CM-AM Convictions Euro is ranked 5 stars by Morningstar (1 ) and has achieved top quartile performance over long periods of time (5 and 10 years).
CM-AM Convictions Euro is a stock picking fund invested in high conviction stocks.
Based on the premise that a company's long term stock performance is closely linked to its operational performance, the selection of securities for the core of the portfolio is based on three criteria: Steady revenue growth, significant growth in operating income over time, and free cash flow generation.
The investment team works on a monthly scoring that highlights the most attractive companies.
She then focuses on meeting the management of the companies so identified, enabling her to understand their business model and strategy, understand their drivers of growth, and so on.
Finally, it model the value creation potential over the medium term, using an in house valuation model based on the ratio of enterprise value to operating income. Where a share price is attractive relative to the target price, the investment team takes long positions.
The core of the portfolio has a tilt towards quality growth companies, which operate in markets with high barriers to entry, have significant competitive advantages, market share and pricing power.
The investment team focuses on companies positioned in dynamic markets that are supported by large trends that accelerate growth even further.
As a result, it identified four broad structural trends globally:
- Technological innovation and the digitalisation of our economies, with the development of e commerce, autonomous cars, industry 4.0, cyber security, the 5G... - The search for a better quality of life, particularly through sport, a more natural diet or the search for a more comfortable habitat - The sustainable economy with the energy transition, the circular economy and sustainable mobility, through, for example, the development of renewable energies, smart connected electrical grids, new and greener means of transport... - Life sciences and medical progress, with dynamic niche markets such as medical testing, hearing aids and ophthalmic surgery.
When markets lend to it, the fund can also diversify into good quality cyclical industrial or financial companies with a solid business model.
Does the fund include an extra financial dimension in its investment process?
The CM-AM CONVICTIONS EURO fund has the SRI label. As such, he incorporates a significant SRI/ESG approach into his investment process. ESG integration in the fund is at 3 levels:
1/In the first step of generating ideas and defining the investment universe: The management team incorporates extra financial criteria for the selection of stocks based on the ESG scores of Crédit Mutuel Asset Management's (FReD) Responsible and Durable Finance Division. The fund takes a selective approach. 20% of the lowest ESG scores are removed from the investment universe.
2/In the second stage of company due diligence and valuation: The proprietary valuation model incorporates a specific WACC (Weighted Average Cost of Capital or Weighted Average Cost of Capital) bonus/malus system based on the ESG rating of each covered company.
3/in the third stage of portfolio construction. We chose to follow the two key performance indicators: Carbon intensity and the percentage of women on the Board. For these two key indicators, the portfolio must at all times have a better score than that of its investment universe.
Does the fund have sector and geographical biases?
It is mainly invested in the industrial, information technology, health care and consumer discretionary sectors, which account for approximately 60% of assets.
The core of the portfolio is Franco German and Dutch, up to 81% of the fund's net assets. All three countries have many high quality companies, including industrial flowers.
In terms of performance, this equity fund tends to absorb phases of sharp monthly losses (greater than -5%) as well as those of sharp monthly increases (greater than +5%).
Currently, the management team is reducing positions in some of the more cyclical stocks with high volatility (eg banks) and taking profits on stocks that have performed well (eg semiconductors), whose short term potential is more limited.
These portfolio adjustments are in favour of defensive sectors (eg healthcare and consumer staples).
Text completed on 7 June 2023