“Quality must be prioritised for the long term”

The ability to defend one's operating margin must be taken into consideration when investing for the long term. Quality values are set to return to the forefront.

Adrien Bommelaer

Adrien Bommelaer is one of the most prominent managers at La Financière de l'Echiquier. He became head of Echiquier Major SRI Growth Europe in 2017, and has also become one of the managers of two of the Paris-based manager's impact funds: Echiquier Positive Impact Europe and Echiquier Climate & Biodiversity Impact Europe. The assets under management of these three products exceed 1.2 billion euros.

How do you see the current risks in the markets?

Adrien Bommelaer: "In the short term, the main question is the impact of inflation and rising interest rates on household consumption. For the moment, the markets have incorporated a dozen or so increases in the US interest rate, with a high probability of entering a recession in the second half of the year or in 2023. Within our various strategies, which tend to focus on growth and quality, we have not made many changes, however, as we are already heavily invested in companies that we believe can defend their margins."

And for the long term?

A.B.: "A regime change is taking place after a period of monetary expansion that has mainly benefited the valuations of unprofitable technology companies. Since the second half of 2021, the market is marked by structurally higher inflation, with rates not falling back to the levels reached between 2009 and 2018. As a result, we believe that the market will increasingly sort out those companies that can defend their margins and cash flows from those that cannot. In recent months, we have shifted our strategies to increase quality companies at the expense of ultra-growth (online, internet, software)¹”.

What is the exposure of the Echiquier Major SRI Growth fund, which you have managed since 2017?

A.B.: "We have around 30 stocks in our portfolio, divided into three main compartments. The first targets visible growth companies, whose weighting we have increased in recent months from 60% to 72% of assets under management. The second (around 17% of assets) targets cyclical companies, while the third is exposed to hyper-growth stocks, whose weighting has been reduced from 15% to 10% of assets under management. We exited two technology stocks to build two new positions in companies with more visible fundamentals, Novozymes and Universal Music²”.

Are there any sectors in which you are not invested?

A.B.: "Firstly, we have a number of sectors where we cannot have exposure due to SRI and regulatory requirements, such as alcohol, tobacco, arms or fossil fuels. We then have a number of sectors where we are structurally underweight, as we have difficulty finding companies that meet our visible growth requirements, such as banking or telecoms. The beginning of 2022 has been more difficult for our strategies, precisely because the markets have focused on sectors where we cannot be exposed, such as banks or energy. But I remain convinced that quality stocks will return to the forefront, and that we must remain faithful to our investment philosophy”.

What are your main sectoral exposures?

A.B.: "Our portfolios are overweight in sectors such as technology, healthcare, industrials and consumer-related companies. In the impact funds³, consumer discretionary will also be underweighted whereas it is present in our SRI strategy invested in large European growth stocks, with a few exceptions such as L'Oréal or Adidas . These two companies are making significant efforts to adopt a more sustainable profile, particularly with regard to all their suppliers. We believe they will lead the rest of the sector in their wake.”

And the energy sector?

A.B.: "We have exposure to renewable energy producers, a direct exposure of about 7% of the outstanding amounts to date with names like Orsted, EDP Renovàveis or Voltalia. We increased our exposure after the invasion of Ukraine. In our opinion, the valuation of these groups should be sustained over the next few years in a geopolitical context that will remain complicated, with companies wanting to better control their dependence on natural gas prices and increase their non-carbon energy sources. The rates of contracts signed between companies and renewable energy producers will probably be renegotiated upwards in the future”.

What is the main value in your portfolio?

A.B.: " Novo Nordisk is our most important weight. The Danish group is a historical leader in insulin, a segment in which it has a significant market share by offering easy-to-use solutions for patients. But it is especially with the advances in the area of obesity that we believe the group has real potential to accelerate its growth over the next few years. This is an even larger population than diabetics, for whom there is currently no alternative to Wegovy, for which the group recently received marketing approval in the US".

The opinions expressed in the document correspond to LFDE's market expectations at the time of publication. They may change according to market conditions and LFDE cannot be held responsible for them.
2 The stocks mentioned are given as examples. Neither their presence in the managed portfolios nor their performance is guaranteed. Certain information relating to the investment process described is not a commitment by the management company and is not included in the fund's regulatory documentation. The portfolio allocation is not a constraint of the prospectus and is likely to change over time.
3 The investor's attention is drawn to the fact that his investment in the compartment does not generate any direct impact on the environment and society, but that the compartment seeks to select and invest in companies that meet specific criteria defined in the management strategy.