Interview with Marie de Mestier, Fund Manager at Crédit Mutuel Asset Management

How would you define your value approach? What are the characteristics of the stocks you are looking for?

CM AM Europe Value follows a disciplined investment process that consists of selecting discounted companies regardless of the economic environment. We therefore stick to our investment philosophy, even if we would be inclined to deviate from it in adverse market environments, as we know right now.
The starting point of our approach is that markets can be inefficient, overreacting to rises or falls for a good or bad reason. So, the value of a company at a certain point doesn't necessarily match its fundamentals. As part of our value investing approach, we look for companies whose fundamentals are not properly reflected in their share prices, companies for which the market remains skeptical, yet have hidden value, and catalysts that will allow their revaluation. Such an approach must first of all be contrarian, but above all prudent and patient.
Also worth remembering is that value investing isn't just about traditionally representative sectors like energy, telecoms and banks. They are affected sectors, penalized by a regulatory environment or by falls in prices, some of whose discount is ultimately justified. We should not just think about the sector when it comes to value style. The best example is the utilities sector, which is gradually losing its status as a value sector with the development of renewable energies, whose valuation multiples are excessive. Mispricing exists in other sectors, such as automakers, whose current discount is > 50 % to the market.

How has CM AM Europe Value performed year to date?

The CM AM Europe Value fund ended 2021 up +19.1%, with a particularly positive contribution from the cyclical sectors (industrials, materials and financials). The beginning of the year coincided with a change in Fed policy as new variant and rising inflationary pressures created significant volatility in stock markets. The sector rotation was particularly strong in the early days, with a enthusiasm for the traditionally value sectors (Energy and Banks), while technological securities experienced significant profit taking. The fund benefitted logically from this paradigm shift in the first few weeks of January.
However, the Ukrainian crisis has beaten up the cards in a very violent way during February. Sectors that had performed well fell back sharply. Growth forecasts have been revised downwards (some analysts discuss between 1% and 2% growth below January's scenarios) and the search for defensive quality securities has slowed the rotation towards value stocks.
Against this backdrop, we reduced the fund's exposure to banking stocks due to downward earnings revisions and their sensitivity to interest rates, borrowing volumes and inflation. Conversely, we reinforced more defensive sectors like health and telecommunications and securities exposed to raw materials.

Is there still upside potential for the Value style?

The beginning of the year was marked by a violent rotation that took many investors by surprise, since the performance spread between the MSCI Europe Value and Growth reached more than 10%, a record since 2003. While the planets were aligned for this style of management, with macroeconomic indicators going in the right direction, a tightening of monetary policies and excessive valuation gaps, the worsening of the Ukrainian crisis came to upset markets. As geopolitics enter the dance, markets tangle and seek refuge on defensive and quality stocks. Visibility remains limited in the short term, with several scenarios envisaged, including that of stagflation which is becoming more and more tangible. The G7 central banks will have to strike a fine line between geopolitical risk and inflation data, which confirm a general environment of rising prices. In any case, we remain committed to our investment process, selecting undervalued, lowly leveraged companies with upside potential.
We remain convinced that the value style still has a nice future, after fifteen years of underperformance. Valuation gaps remain historically high and increasingly unjustified given earnings growth and fundamentals. Stellantis is a case in point: A world class car maker, whose operational performance has been demonstrated in recent quarters, yet still trades at some of the lowest multiples in the market (P/E 4.8x 2022e). A valuation level that does not reflect the group's operational excellence and growth prospects.
In this uncertain environment, CM AM Europe Value did not materially alter its sector exposure. The fund remains positioned on energy and raw materials securities, which we have recently reinforced (roughly 13%), like BP, Rio, ENI and Arcelor, while financial securities have been trimmed (~ 14% of the fund). The fund remains positioned in more defensive assets to cope with this complex environment.

How do you approach ESG integration in your Value management?

The ESG approach is an integral part of the investment process as it intervenes at every stage, from the creation of the universe to the construction of the portfolio. We have also recently made a major change in fund management, integrating a SRI approach. Such an approach is certainly not incompatible with value investing, contrary to popular belief. Environmental, social or governance criteria are not reserved for growth sectors. Banks, oil companies and car manufacturers have also developed sustainable development programs, with most of the ambitious targets of reducing their carbon footprint, or social policy.
Finally, ESG integration did not have a major impact at the management level, as only one stock had to be sold last year due to a red controversy, RD Shell.
In general, the extra financial analysis of a company becomes inseparable from fundamental analysis in order to better understand its strategy and commitment over the long term.
CM-AM Europe Value is a conviction based fund that identifies companies that are facing a turnaround, amplified by the markets, and where we have identified clear catalysts, using an extra financial approach as described in Crédit Mutuel Asset Management's philosophy.