SKANDIA GLOBAL FUNDS PLC - Fidelity Investments

Skandia Global Funds plc
Annual Report and Audited Financial Statements for the year ended 31 December 2011
SKANDIA EUROPEAN EQUITY FUND
INVESTMENT ADVISER’S REPORT FOR THE YEAR ENDED 31 December 2011
Skandia European Equity Fund – Goldman Sachs Asset Management International
Investment Adviser’s Commentary (continued)
In both the fund and the general market, the industrial sector experienced weakness. The fund‟s positions in Dutch companies TNT
Express and PostNL, both formally part of TNT N.V., were large detractors from performance. To give some background, Dutch
transportation company TNT N.V. was restructured in May into two companies; PostNL, which focuses on mail delivery and TNT
Express, an international express and cargo delivery services company. PostNL continues to own a stake in TNT Express. GSAM had
expected the demerger to be a positive catalyst for the stock, but it has instead been a negative one, particularly for PostNL, which is
the slower growing, high dividend-paying stock which operates in a deregulated market. GSAM continues to hold both companies as
it believes there are a number of positive drivers in place for both. PostNL has many areas of opportunity including price increases, a
healthier competitive landscape, growth in their parcels business, and the possibility of branching out to international markets. GSAM
believes that TNT Express has a strong Express parcel delivery business and is well positioned to benefit from the company‟s move to
seed growth in China earlier than competitors.
In the third quarter the fund underperformed its primary benchmark, the MSCI Europe GR Index. Strong stock selection in the
financials and materials sectors were the main positives during the quarter, whilst GSAM‟s positioning in the consumer staples and
healthcare sectors detracted from relative performance.
Despite the weakness of the financials sector in the broader market, GSAM‟s stock selection in this area benefited the portfolio in the
third quarter. BNP‟s stock price had been experiencing weakness since July amid the ongoing European sovereign debt fears.
However, GSAM took the view that these concerns had been exaggerated, which was reflected in the share price, so it decided to take
advantage and add to the portfolio‟s position at an attractive valuation in September. Since then, the stock has begun to recover and
has contributed to the portfolio‟s returns. Elsewhere in the portfolio, a stake in the UK based oil and gas company Tullow Oil was one
of the top contributing investments in the portfolio during the third quarter. Shares of the company increased after an oil discovery
made at the Zaedyus exploration well in offshore French Guiana. Tullow has built a strong and unique exploration position in South
America and this could mark the start of a significant and potentially transformational long-term exploration and appraisal campaign
in the region. In addition, UK based software company Autonomy Corporation was a strong contributor to performance. However,
overall stock selection in the information technology sector lagged. Shares of a holding in Autonomy soared after the company agreed
to be acquired by Hewlett-Packard at a 78% premium to the previous day‟s closing share price. GSAM subsequently trimmed the
position, taking profits. The performance of the portfolio‟s holdings in the information technology and consumer staples sectors
highlight how important single stock selection is as the primary driver of returns in this portfolio. In contrast to the positive
performance of Autonomy, a holding in Temenos, which specialises in packaged software for banks, was one of the biggest detractors
during the third quarter. The share price‟s weakness was due to investor concern that European banks would defer purchases given the
uncertainty related to the European sovereign debt crisis. GSAM has maintained a small position in the company in the belief that
Temenos has compelling long-term prospects given its strong position in the growing market of packaged-software solutions for
banks, and its significant exposure to emerging market growth.
UK based consumer goods company, Reckitt Benckiser, was the top performing stock during the quarter for two main reasons. First,
its core household and personal care business remained relatively resilient, buoyed by market data suggesting that rival Procter &
Gamble was promoting some of its competing household markets less. Second,a positive stream of news concerning its
pharmaceutical business, notably the drug Suboxone, benefited the company‟s share price. In contrast, Danish brewer Carlsberg was
the largest detractor in both the consumer staples sector and the portfolio as a whole. Carlsberg was hit by a lowered earnings outlook
for 2011 due to near-term weakness in Russia where higher taxes have depressed beer consumption. In addition, investor risk aversion
amid uncertainty in the markets, weaker global consumer sentiment, and news of a poor quality barley harvest put more pressure on
Western European profitability. In response to these developments, GSAM reduced its investment in the company to mitigate nearterm
risks and continues to monitor Carlsberg‟s outlook closely.
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