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Saemor Europe Alpha fund down 3.5 per cent n October

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The low quality rally in October, most notably during the first 10 days of the month, dented performance of the Saemor Europe Alpha Fund considerably, resulting in a loss of 3.5 per cent for the month.

While the long book contributed positively on the back of the overall market strength, it underperformed the underlying market because of a low risk bias. Most of the losses were generated in the Consumer Discretionary, Consumer Staples and Industrials sectors. Short positions in Fresnillo, CWC and BMW were unsuccessful. The biggest positive stock contribution came from the fund’s long position in Peugeot.
 
Style patterns observed since May reversed in October, a month which was characterised by a value and risk rally. Cyclical value metrics like P/B and P/S enjoyed a strong rebound driven by robust macro data, higher oil prices and expectations of easier global monetary policy. On the flipside, price momentum factors suffered as crowded short positions in low momentum stocks were closed and high momentum names lagged.
 
Price momentum has recently become highly correlated with profitability, growth and quality, so three of the fund’s four factor quadrants posted a negative performance for the month. Earnings momentum came down in line with price momentum. With the benefit of hindsight we were not diversified enough in our factor allocation, which had been working well during the first 9 months of 2015. For the year the fund is still up comfortably.
 
European equities enjoyed a strong rebound in October, offsetting much of the poor performance experienced over the summer months. It was the best month since October 2011. Signs of economic stabilisation and a more accommodative monetary policy stance in China, in addition to lower fears about the Fed all contributed to a positive global market sentiment. Relatively resilient economic data from the Eurozone and the prospect of more stimulus from the ECB were key drivers for European equities. It was not all good news: European earnings missed expectations for the first time in two years. Equity implied volatility slid sharply. Cyclical sectors outperformed defensive sectors.
 
Automobiles, Energy and Information Technology generated double digit returns, while Media, Banks and Health Care lagged. The top countries included Germany, Belgium and Finland. Stocks in Denmark, Ireland, United Kingdom and Switzerland underperformed. Ten year interest rates in Germany declined after Draghi basically promised more QE in December, while they rose marginally in the UK and US. Credits benefited from the risk-on mode. Commodities rose with oil and precious metals prices strengthening. The euro weakened 1.6 per cent versus the US dollar on the dovish language from the ECB and its divergence with the Fed’s hawkish guidance. The British pound strengthened 2% as markets started to reprice expectations of an earlier rate hike. 

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