When your fund has outperformed its benchmark by 56.56 per cent in the three years to 22 February and returned 111.55 per cent since launch in 2015, you can be forgiven for caring little about macroeconomic conditions.
Bertrand Faure, portfolio manager of Eric Sturdza Investments’ Strategic European Silver Stars Fund, has delivered outperformance consistently and irrespective of market conditions over the past eight years.
Even during the market horrors of 2022, the fund, which invests in European small- and mid-cap companies, returned +12.89 per cent relative outperformance.
“I never take a view on where the market is going and if anyone says they have a view, they are lying,” Faure says. “If I knew where the market was going, I would not spend my time talking to 500 companies every year. I would buy and sell futures, my day in the office would last 30 seconds and then I would go and play golf.”
Instead, Faure says he invests in companies that deliver stable, sustainable returns in all market conditions, and that means finding businesses with demonstrable free cash flow.
“Traditionally [investors] tend to look at P&L, then if they have time, they look at the balance sheet to figure out whether the company is leveraged or not, especially when interest rates are going up. And then finally, if they have some spare time during the weekend, they go and look at the cash flow statement. Our process is totally the other way around.”
Faure starts by examining a company’s cash flow statement to assess how much cash is delivered during the 12-month period and whether that leads to genuine net debt reduction. Only when this is complete, does he look at the company accounts.
“At the end of the day, P&L is just a nice way to present things. What you really need to know is cash flow because companies need that to repay their debt. And that becomes even more important when interest rates are rising,” he says.
Testament to Faure’s focus on cash flow is the positive contribution made by 11 out of the 29 companies held in the Silver Stars Fund during a challenging 2022.
However, Faure says he prefers volatile condition arguing that life gets more difficult for an active manager to prove its worth when the markets are up, as they were two years ago.
This is demonstrated in 2021, when the Silver Stars fund outperformed the index by 2.65 per cent, versus an outperformance of 30.62 per cent in 2020 and 12.84 per cent in 2022.
“While 2020 was not easy, it was easier [than in 2021) because we just had to avoid investing in certain sectors. In 2021 when the market took 25 per cent [Silver Stars’ benchmark index returned 24.91 per cent in 2021] it was actually harder for us to deliver that outperformance.”
The Silver Stars fund is also fortunate in that it benefits from long-term exposure to companies with strong ESG credentials, with its largest holding in French renewable energy company Albioma.
“Albioma has been the largest position in the fund from day one not because of ESG but just because it has a fantastic business model with fantastic margins,” he says.
Looking to the rest of 2023 and Faurer will not comment on the macroeconomic outlook but given his confidence in the Silver Stars Fund’s process, he expects similar success this year.