In these troubled times, we hope this finds our readers in good health and good spirits. Lives lost are the first and immediate tragedy, the economic fallout and longer term social and health issues will become increasingly apparent over time. It has certainly prompted our reflection – what’s more important – health or wealth?

Not unsurprisingly, the Fund’s returns over the quarter were, to be frank, dismal. The Euro share class was down 30.7%, and the USD share class was down 32.2%1  . The Australian Fund being down 22.2% was helped a little by the fall in the AUD. But how meaningful are these numbers? We are experiencing daily stock price swings of over 25%2  . Shares are trading more like options than common stocks. The value of these underlying businesses, whilst clearly impaired, has not halved in two weeks, and is not fluctuating by 20% or more in a single day. During March, prices were determined by fear and liquidity, forced selling and capital requirements. They became devoid of underlying business values.

The liquid equity market is an immediate way for investors to access their capital – and accordingly, it is one of the first markets to re-price, and one of the most likely to be irrationally priced in times of distress. When we understand this, we can accept that the information equity prices supposedly convey is likely to be flawed. And although it is easier said than done, recognising and tolerating this is an important part of an investor’s mindset.


  • As can be expected during such a period of complete uncertainty, the sell-off was indiscriminate. There was no escaping this bloodbath. The corollary means opportunities are likely to arise.
“You make most of your money in a bear market, you just don’t realize it at the time.” – Shelby Davis
  • Market movements were brutal. During the quarter, from peak to trough, more than half of the Fund’s holdings were down more than 50%, and more than a quarter were down more than 60%2  ! Seven of our 23 holdings experienced price movements of more than 30% within a single trading session (and many of these on more than one occasion).
  • Gilead3  , the US biopharmaceutical company (with its current Remdesivir product being tested for efficacy in treating Covid-19), was the sole positive performer. Its share price was up 15%.
  • What makes these times truly unprecedented is that companies are simply on hibernate mode, with many showing a complete (or near complete) absence of revenue until further notice.
  • Our attention has recently focussed on a metric new to us (as it is more appropriate for speculative, non cash generative businesses or for debt holders). It is called “days of survival with zero revenue”.
  • This has been particularly apt for our airline holdings, which were the main detractors to performance. More on this later.
  • In times like this it is pleasing to hold a reasonable amount of cash (18.6%), which provides ammunition to invest in great businesses at cheaper prices. But rather than rushing in, we are deploying some cash sporadically and opportunistically.
  • As examples, in what we considered to be unjustifiable sell-offs, we added to a few of our long term positions in North America: Dick’s Sporting, Lyondellbasell, Linamar, and Methode Electronics.
  • In a market flooded with trillions of dollars in stimulus, we question the real value of fiat currencies. This prompted our investment in a business that meets our criteria, is priced reasonably, and offers exposure to gold, being Regis Resources.
  • Prior to the Covid-19 pandemic being on the front page of every newspaper, we initiated two new positions: Vestas (wind turbine producer, installer and operator in Denmark) and HCA Healthcare (US hospital owner and operator).
  • We also completely sold four companies, to end the quarter with 23 holdings.


Figure 1: Top Contributors/Detractors (Quarter)4  

Source: Alluvium, Factset, Private Reporting Pty Ltd.


Figure 2: Top Contributors/Detractors (Year)4  

Source: Alluvium, Factset, Private Reporting Pty Ltd.

Contribution (continued)

Table 1: Contribution Details

March 2020March 2020 Quarter SummaryMarch 2020 Year Summary
StockEnd WeightBeg. WeightReturnContributionBeg. WeightReturnContribution
Capri Holdings1.5%3.7%-71.7%-2.5%2.5%-76.5%-2.9%
Dick's Sporting5.1%6.2%-55.4%-3.7%5.2%-39.1%-2.4%
Lear Corporation5.5%6.3%-40.5%-2.4%5.3%-39.1%-2.1%
United Airlines2.1%2.0%-64.1%-2.2%2.3%-60.3%-2.1%
H&R Block3.9%4.4%-39.3%-2.1%4.7%-39.2%-2.1%
Western Forest1.1%1.6%-47.6%-0.9%-64.9%-1.5%
Hawaiian Holdings2.4%-67.4%-1.7%2.8%-63.2%-1.4%
Delta Air Lines2.2%3.0%-51.0%-1.7%4.6%-43.7%-1.3%
Thor Industries2.9%3.5%-43.2%-1.8%2.6%-31.2%-1.3%
Southwest Airlines2.9%2.9%-33.8%-1.1%-33.6%-0.9%
Subtotal Equities37.4%46.1%-24.0%34.7%-21.0%
Other Equities44.0%37.6%-7.2%36.9%-4.9%
Cash, Currency & Fees18.6%16.3%0.5%28.4%-0.1%
Total (EUR)100.0%100.0%-30.7%-30.7%100.0%-26.0%-26.0%

Source: Alluvium, Factset, Private Reporting Pty Ltd.

Table 2: Quarterly Purchases

AlibabaIncrease Position
Thor IndustriesIncrease Position
Dick's SportingIncrease Position

Table 3: Quarterly Sales

T-GaiaComplete Sale
Lear CorporationDecrease Position
LinamarDecrease Position
H&R BlockDecrease Position

Performance Review

With such a significant sell-off during this quarter there is little positive news. The extent of the price declines, and its broadness, took us by surprise. We are sure we are not alone.

With fears that Covid-19 will result in economic conditions similar to, or even worse than the Great Depression, the viability of all businesses is being questioned. This is particularly the case for those businesses with high fixed costs. It is no secret that our process favours operating leverage to financial leverage (although we are tolerable of reasonable levels of the latter). So, as a consequence of our process, at the start of the quarter around 28.1% of the Fund was invested in businesses with high operating leverage (via its 15.0% interest in airlines and 13.1% weighting toward retailers). We discuss the airlines (which cost the portfolio 6.8% over the quarter) in the next section. As for the retailers, two (Dick’s Sporting and Capri Holdings), were hammered – down 57.0% and 71.7% respectively. Both announced results during the quarter (prior to any real effects from Covid-19), in which there were no surprises. Subsequently, both have provided business updates and have addressed their funding requirements. Both businesses are obviously suffering, but we do remain confident in their long term viability. We bought more Dick’s Sporting across two tranches during the quarter – and although we didn’t perfect our timing, we are confident these purchases will prove to be wise over the longer term. We also tried to buy some more Capri Holdings (at a bargain price), but we were not successful (at least not until after the end of the quarter).

We will not write about all of the poor performers (it would take too long), suffice to say that we believe that Lear Corporation (-40.8%), Lyondellbasell (-47.5%) and Thor Industries (-43.2%) were sold off as a result of the cyclical nature of their business. We did view the price falls as over-done, and we bought more Lyondellbasell during the quarter.

We completely sold four positions during the quarter. These included Shenhua Energy (the Chinese coal producer, sold due to valuation concerns), Tosoh (the Japanese chemical producer no longer meeting our screening criteria), Franklin Resources (which we previously indicated we would likely sell), and Hawaiian Holdings (discussed in the next section).

Three new positions were introduced. HCA Healthcare is the owner and operator of 185 hospitals and around 2,000 sites of care across 21 US states and the UK. Its facilities are located in regions with favourable demographics, and being a large player in fragmented market offering it offers scale benefits. We believe it to be a high quality, stable business. Our major concern, being draconian reforms to the US healthcare industry, was alleviated as the momentum in the Democratic race switched from Bernie Sanders to Joe Biden. We now believe that any reforms will most likely be palatable. Although we bought our shares at attractive prices (averaging a 30% discount to our valuation, and with a 7.7% free cash flow yield), most of our buying was prior to the worst of the market impact from Covid-19.

Vestas, listed in Denmark, is one of the world’s largest manufacturers, installers and operators of wind turbines. Whilst we like the current operating metrics of the business (high ROIC, decent growth), and consider it to be reasonably priced (around 6% owner’s earnings yield), we are particularly attracted by its ability to increase its recurring revenues by securing long term service contracts over its installed base of turbines. And investing in the renewable energy sector also sits well with us.

The other new holding is the Australian listed gold producer, Regis Resources. With unprecedented levels of cash being pumped into economies, we have concerns over the longer term real “value” of cash. In short, we can see that its value relative to commodities is at risk. With the sell-off in the equity market, we can access one such commodity, gold, in a corporate structure at an attractive price. Regis Resources is the only precious commodity business that meets our screening criteria. Whilst we do not see it as “strikingly” cheap (we bought it at prices in line with our valuation), we see earnings upside coming from: (1) lower AUD and higher gold price (though in the short term this is mitigated by its hedging arrangements); and (2) lower production costs (due largely to the steep decline in oil prices). So, whilst ordinarily we would not have purchased this business at prevailing prices, given Regis Resources holds 8.2 million ounces of what may well be an under-priced commodity, we believe it to be a prudent holding given the current environment.

The Airlines: Our Thoughts and Actions

We started the quarter with a 15.0% position across five airlines: Ryanair, Delta, Southwest, Hawaiian and United. With share prices falling between 34.0% (Southwest) and 64.4% (Hawaiian), they together cost the portfolio 8.4% and by the end of the quarter they represented 11.5% of the Fund (although we had sold Hawaiian).

Our rationale for investing in these businesses was that all were achieving (and had been many years), acceptably high returns on their invested capital (ROIC), and were trading at prices in-line with our valuations. Based on the Fund’s weighted average positions and their share prices at the start of the quarter, these airlines offered a free cash flow yield of 7.6% and a net profit yield of 9.8%. As for the quality of the businesses – their ROIC over the last 8 years has been close to 20%, and their annual sales had increased by 5.1% on average over the last three years. And as for risks, we were comfortable with their short term financing arrangements and we felt their average fixed charge ratios ranged from tolerable (for Hawaiian and United) to acceptable (for Delta and Southwest) to comfortable (for Ryanair).

These businesses all reported solid operating results for the periods to the end of last year. Aside from some concerns in relation to Hawaiian (increasing competition from Southwest, regulatory problems with proposed code share arrangements, and clampdown on accommodation providers in Hawaii), we were comfortable with our holdings. And, in what hindsight clearly suggests was poor timing, we actually bought a little more United in early February.

Then along came Covid-19. We were not smart enough to quickly predict the extreme ramifications, and as they became increasingly apparent, we felt the sudden mark-down of prices was extreme. Our thinking was (and still is) that air transportation is not an industry that will simply fall by the wayside. We are in no doubt there are difficult times ahead. We do not dismiss the possibility of changes in the way we travel, and we foresee a period of general hesitation. But unlike, for example, large scale cruise line tourism, we believe air travel will re-emerge largely unscathed within a reasonable timeframe.

The obvious question then is: how has the value of these businesses been impacted? Firstly, let’s acknowledge that in order for a business to have any value in the current environment it needs to actually exist in the future environment (when we assume things will have recovered). So our imperative was to try assess the risk of business failure, first by estimating out how long each airline could survive with no revenue, and then also trying to assess their ability to raise additional capital if necessary. The analysis led to us having concerns with Hawaiian, and we sold that position.

Then came the news of the $2 trillion stimulus and the subsequent passing of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which stipulates a $50 billion airline component. At the time of writing, the airline’s submissions to US Treasury have provided greater clarity on the actual ‘cash burn rates’, and the grants (and their broad terms) have been announced. This increased our confidence of their survival. But now we need to consider the likely costs of this, the additional capital likely to be required (and the likely terms of those issues), and the values of these businesses over the longer term.

The last of these is the easiest for us to predict and the one we have the most confidence. In our view, the business values are unlikely to be materially different in say, ten years time, to what they would have been had there not been Covid-19 pandemic, way back in 2020. In fact, past incidents like this have proven to be catalysts for industry consolidation resulting in fewer but stronger participants and more rational pricing. We have already seen in Europe the collapses of Flybe, the UK carrier (in early March), and Germanwings (the Lufthansa subsidiary) in early April. Both will be to the benefit of Ryanair.

However, although the business values may be unchanged, the share of value between stakeholders (debt and equity) is expected to materially change. We have applied the new information in relation to CARES Act grants and loans, and refined our assumptions on cash burn rates and the likely additional capital required. Based on that analysis, we foresee the underlying equity values to be impaired to varying degrees, and to the extent that we feel justified (but very disappointed) with selling Hawaiian, and we have since started to divest our United position.

Closing Remarks

Even though we feel like we are navigating in unchartered territory, the times we live in are not ‘technically’ unprecedented: The Spanish Flu of a century ago infected about 500 million people worldwide over three years. However, witnessing half the world’s population forced to stay home, in such a globalised economy, is what makes the situation extraordinary.

One of the greatest challenges of investing is to gauge the psychology of market participants and to form a view as to whether the pendulum has swung too far towards excessive optimism or excessive pessimism. So let’s first put this peculiar situation in perspective. The equities market has simply reverted to the level it was two years ago and its 5 year and 10 year returns have still far exceeded longer term averages – which prompts the question: Is this ‘adjustment’ severe enough? The 30% correction in equity markets, when the economy is facing a depression-like scenario, may well not be ‘enough’.

But rather than try to predict future market movements, we prefer to remain focused on our portfolio holdings. And for these companies we own, the first year’s cash flow represents less than a tenth of business value. So, on the face of it, a fall generally in the order of 30% (but up to 70% in some cases) does seem exaggerated. But it is not quite so simple, for although there is no doubt that Covid-19 will affect the earnings streams of the businesses we hold, the challenge is to guesstimate the degree of its effect for each business, and how this trickles down to their equity values. And this varies considerably, depending (amongst other factors), on the business’s industry, its operational leverage (being a function of its margins and variability of its costs), its financial leverage, and its access to funding.

As an example, for one of the more severely affected sectors, the airlines, our analysis led us to estimate equity values have declined by between 60% (for United) and 20% (for Southwest). And of course, this is after applying the benefits of the CARES Act loans and grants. Contrast this with Gilead, the biopharmaceutical company, where we consider the impacts of Covid-19 are likely to be negligible (or potentially positive if the Remdesivir trials show efficacy for Covid-19), and it has little debt.

We have ‘taken advantage’ of the sell-off and increased our stake in a few holdings. When we can buy at around half the prices we were prepared to pay a few months back – it initially appears a ‘no brainer’. But this again may be too simplistic. We reserve the right to change our view, as greater clarity emerges as to the ramifications of Covid-19 on each business the Fund owns.

Many of our investee companies will report operating losses this year – a first since the GFC. This serves to remind us that a purely quantitative screening process can only be used as a guide. And further, in extreme times like these, we must venture outside the bounds of the traditional valuation methods we have historically applied.

Our mandate is to invest according to our dedicated strategy with the objective of achieving an acceptable long term return without taking on excessive risk. This means we look at the value of these businesses (which does not fluctuate widely when assessed with a long term view), rather than quarterly results or revisions of near term earnings expectations. And we will not particularly seek businesses just based on the expectation that they will experience short term benefits from Covid-19. All investments must meet our long term screening criteria and be available at a reasonable price. To venture outside of this would be contradictory to our principles and to what we consider to be our investment mandate.

We are wishing readers all the best as we continue to navigate these strange times.

Stuart Pearce

23 April 2020

Alexis Delloye


Figure 5: Diversification by Sector

Source: Alluvium, Factset

Figure 6: Diversification by Region

Source: Alluvium, Factset

Table 4: Fund Overview

Top 15 Holdings64.2%
Number of Holdings23
Weighted Average Market Cap. (USD m)29,353

Source: Alluvium, Factset

Table 5: Quality Metrics (weighted average)

Fixed Charge Coverage (3y median)8.6x
Sales Growth (3y average)2.3%
Return on Invested Capital (3y average)24.0%
Return on Invested Capital (8y average)26.3%

Source: Alluvium, Factset

Table 6: Pricing Metrics (weighted average)

Enterprise Level Yield (EBIT/EV)11.8%
Earnings Yield (NPAT/Mkt Cap)11.6%
Free Cash Flow Yield (FCF/Mkt Cap)9.4%

Source: Alluvium, Factset

Table 7: Top 15 Holdings

Lear Corporation5.5%
Dick's Sporting5.1%
Samsung Electronics4.6%
H&R Block3.9%
Regis Resources3.7%
Walgreens Boots3.7%
Methode Electronics3.6%
HCA Healthcare3.2%
F5 Networks3.1%

Source: Alluvium, Factset



Alluvium: Alluvium Asset Management Pty Ltd, ABN 69 143 914 390, AFSL 476067
Australian Fund: Alluvium Global Fund
Factset: Factset Research Systems, Inc.
Fund: Conventum – Alluvium Global Fund

Portfolio Metrics

Enterprise Value (EV): The market value of equity plus the book value of debt
EBIT: Earnings before interest and tax
Earnings Yield: The most conservative result from four different calculations at the equity level
Free Cash Flow (FCF): Cash flow from operations less capital expenditure
Mkt Cap: Market capitalisation
NPAT: Net profit after tax
Operating Assets: Total assets less total liabilities plus total debt (Alluvium adjusted)
Owner’s Earnings: Operating cash flow, plus cash interest paid less assumed maintenance capital expenditure
Return on Invested Capital: Owner’s Earnings as a percentage of Operating Assets


1 Source: European Fund Administration S.A.

2 Source: Factset

3 Company names have been abbreviated throughout this document in the interest of readability.

4 Returns are time weighted, include dividends, and are expressed in local currency.

Alluvium is solely responsible for the preparation of this document.

The Fund is a sub fund of Conventum. Conventum is an open-ended investment company (société d’investissement à capital variable, “SICAV”) with multiple sub-funds incorporated under Luxembourg law, subject to Part 1 of the Luxembourg Law of 17 December 2010 on undertakings for collective investment, as amended. The SICAV has appointed Conventum Asset Management S.A. as the Management Company in charge of the portfolio management, the central administration and the distribution of the SICAV. Conventum Asset Management S.A. has appointed Alluvium as the Asset Manager of the Fund. Relevant documents for the Fund are available via the following links: Prospectus (FR/EN), Key Investor Information Document (“KIID”), (FR/EN).

Alluvium is the issuer of units in the Australian Fund, which is an unregistered managed investment trust available to Wholesale Clients as defined under Section 761G of the Corporations Act 2001 (Cth). The Australian Fund feeds into the Fund. An Information Memorandum (“IM”) is available here.

A person should obtain a copy of the Prospectus, the KIID, and/or the IM and should consider the documents carefully before deciding whether to acquire, or to continue to hold, or in making any other decision in respect of shares in the Fund or units in the Australian Fund.

This document was prepared by Alluvium and does not contain any investment recommendation or investment advice. This document has been prepared without taking account of any person’s objectives, financial situation or needs. Therefore, before acting on any information contained within this document a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs. Neither Alluvium, nor its related entities, directors or officers guarantees the performance of, or the repayment of capital or income invested in, the Fund nor the Australian Fund.