The team of managers at William Higgons has been rewarded regularly for many years for superior long-term performance, and focuses on small businesses with poor value, without compromising on quality. The “quality value” approach has enabled the historic Indépendance et Expansion France Small Fund to achieve an annual performance of 13.2% since 1994, compared to 7.2% for its benchmark. Its European counterpart, launched at the end of 2018, did well at the start of the year, posting a drop of less than 10% versus more than 20% for its benchmark (at 7/7/22). After such a complicated start to the year for the markets and especially for small stocks, we wanted to meet one of the best managers in the market.
William Higgons, the European version of the I&E France fund that has made your reputation work so well in these challenging markets. What makes the two boxes different?
“We have the same systematic approach and half of the stocks we invest in are in both funds. The Europe fund is a little less focused because its management is more collective and the world of ‘investable’ stocks is three times larger (about 300 shares, compared to about 100 in France) In addition, we We tend to allow ourselves to get carried away by outperforming files, which explains why the historical fund has slightly heavier positions like SII, which we’ve been in for a while now. France due to the presence of some large capital from the media sector that entered the portfolio in 2020 via opportunism: Publicis, TF1, M6 or Ipsos Dassault Aviation and its market capitalization of 13 billion is the largest capitalization we have in the portfolio.
In terms of performance, our funds are among the best this year thanks to the resurgence of interest in valuations at the beginning of 2022. In addition, and this is especially true of the Europe Fund, we have been in a good position since 2021 on topics that have worked very well: defense with German equipment manufacturer Rheinmetall (armored vehicles, defense systems, etc.), wood power with Moulinvest and Poujoulat, or yachts with Catana and Fountaine Pajot, eased the decline, even if that was less true for many weeks with slack forecasts that Significantly diverted investors away from stocks that are considered cyclical. ”
I&E France fund performance: blue dot on the chart on the right (Source: Quantalys)
These periods of apparent consolidation are an opportunity to seize opportunities. Are there files that could be considered massacre in your group?
“Given that we cannot predict the economic cycle and market reversals better than others, we are fully invested at all times. Statistically, studies show that this is the best thing to do. However, it is clear that the current period is particularly interesting to invest in Stock market in well-chosen stocks.This is reflected in the average rate of dividend and weighted average, which is 8 times in the France Fund and 9-10 times in the Europe Fund, that is, a discount of 50% and 35 percent relative to the market on Respectively, this is explained by the decline in valuations of most stocks and cyclicality in particular, as the market considers a recession certain and analysts lag behind in their forecasts. The way to arbitrate affected values in favor of stocks has relatively escaped the cycle reversal.Our work at Indépendance et Expansion is primarily concerned with the fair valuation of the files in the portfolio.This leads us to keep most of our cyclical files: Its so low that even by dividing by two or three the expected results in 2022, it still makes sense! I’m thinking of Jacquet Metals driving 3x the expected results this year, TF1 or even Herige and Samse which, in the construction sector where we’re pessimistic, should do well evaluating well below 10x the expected results. In this type of stocks sensitive to economic cycles, and I am also considering temporary work, it is advisable to think about the average results over the cycle. Stocks remain the best investment in a constantly inflationary world because they are real assets and real interest rates are low.”
Selection process for high quality securities at attractive prices
Speaking of temporary, are you a contributor to Synergie and Crit, but also to ESN, whose percentages are much higher?
“It is true that IT service companies remain expensive in absolute and historical terms. However, their markets appear to be sustainably backed by the digitization of economies and the problems of inflation and shortages are well managed, especially by the best players in the market. With SII and Aubay, we have good players. High quality are very confident of solid demand from their customers in almost all sectors.Meanwhile, Crete is benefiting from the normalization of the airport sector, which reached 30% of its turnover in 2019, and Synergy has shown great stability despite the vagaries of recent years , in addition to the fact that the labor market is still tight and the temporary worker situation is favorable for the wage level of the workers. Finally, these two companies have a cash cushion which in the short term the number of rating ranks and in the long term can be used intelligently by the families of the shareholders.”
In boats, the katana is preferred despite the higher instant rating…
“Katana has the advantage of being a 100% player in a particularly thriving catamaran niche where their Bali model stands out from the competition. Very strong demand from Bali gives them an order book without the price guarantee they should be able to honor thanks to a good recruitment campaign in France and Tunisia, We are also shareholders in Fountaine Pajot whose valuation is very attractive but still sanctioned by the takeover of the Dufour monohull shipyard, at a loss and more sensitive.Reading for Beneteau due to a more diversified business portfolio, with less exposure to the Catamaran market and a departure from management raising questions no inevitably. It’s gone down a lot as we watch the file. In a similar sector, the European leader in recreational vehicles Trigano seems to us to be underestimated very unfairly.”
Have you had to reposition the portfolio in light of the particularly volatile and uncertain environment in recent months?
“We haven’t moved much in a couple of months after we sharply reduced our exposure to the construction sector at the start of 2022 due to higher prices, building costs and lower building permits. We actually exited Vicat, which is suffering from high energy prices, a hexaum. and Kaufman and Brod. In the same spirit, we took our earnings at Rothschild & Co due to a turnaround in the looming cycle in the M&A sector and valuation multiples in private equity that are likely to decline. Recently, we discounted Derichebourg significantly. Indeed, despite the devaluation of its core scrap metal recycling business, the acquisition of a stake in Elior worries us. We have also downgraded our position in Exel Industries. The last post surprised us: we did not expect such a deterioration in margins while the realignment raised hopes for good resilience in profitability. Specializing in sprayers intended for the agricultural, industrial and general markets had difficulty weathering cost increases, and suffered from margin pressure. In addition, diversification into boats does not seem right to us.
We boosted the energies of Dekuple and Technip. The former is a data marketing company that has enjoyed consistent, steady growth over the past few years, with an attractive valuation. Technip Energies, the French specialist in liquefied natural gas (LNG), will benefit from the desire of European countries to dispense with Russian gas and remain valuation attractive, with less than 10 times the results. ”
What is your approach to ESG analysis?
“We have our own standards in this area and always pay special attention to governance, executive compensation, environmental risks and working conditions. This aspect of company valuation undoubtedly improves corporate knowledge. On the other hand, we are very careful about standards to the exclusion of certain sectors such as fossil fuels or arms. Recent events confirm this to us.”
The main holdings of the I&E Europe Fund to me end of June 2022