Van Der Mandele ARAR Fund March 2024 Investor Letter

Dear investor,

We’ve officially turned one year old! We are proud to say that we are growing, both through fund performance and through new investors finding our fund. Collectively, we have grown over 50% in the past year and have a vision for another 20% growth. Our show is clearly appreciated and people appreciate last year’s outstanding performance. February and March were a continuation of this, with the fund price rising by 4.6% in both months. In both months, we outperformed on all the benchmarks we tracked, so there’s a lot to cheer about!

Performance of these months in detail

The Fed left interest rates unchanged, as had been expected since January when inflation was higher than expected. Markets continued to rise after the Federal Reserve surprisingly reiterated its forecast for three interest rate cuts this year. I wouldn’t be surprised if we end up with a year without cuts, and it looks like markets don’t quite trust the Fed at its word either. In any case, strong undercurrents pushed markets higher, and the fund benefited from this as well. The fund’s outperformance was mainly driven by Jackson Financial’s (JXN) multiple-deserved downturn (moving from a consistent P/E of 1.5 to now 5), Peugeot Invest essentially firing its CEO (finally), and Alphawave (OTCPK:AWEVF) catching up. . After their impressive profits in January.

The past two months have seen the bulk of our portfolio profitable. Most of them were quiet, but some deserved some extra attention. The company that moved the most after earnings was Basic-Fit. From my perspective, there wasn’t anything particularly interesting about the earnings themselves. There were even some pleasant surprises, as the energy cost forecast was lower than my calculations. However, the stock fell more than 15% that day, even after it had already fallen more than 10% following Barclays’ downgrade. While analysts gave many reasons, all of these reasons were already known before the earnings announcement. The decline was likely caused by an earlier decision to sell from one of the largest shareholders, OLP Capital which owns 10%. Since volume like this affects the market, they were probably hoping to find a little (buying) volume by timing it on earnings day itself. We’ll dive deeper into Basic-Fit in the “Company in Focus” item.

Peugeot Invest ( OTCPK:SFFFF ) also made a profit, announcing write-downs worth more than €400 million on real estate investments. While management’s current expectations were already quite low with the fund trading at 60% of NAV (as described in the December investor letter), that was still a bad surprise and caused the stock to lag by 5%. However, the current CEO made a valiant effort to make it seem like they were doing a great job. He explained that the net asset value rose to a record level, while the market last year was “difficult.” Let me take this opportunity to put it into perspective: markets are up over 20% last year. An individual asset manager like me was able to make 14% for investors after kicking in fees (after) the market rose more than 10% in January. However, Peugeot Invest managed to make essentially 0 money from its entire non-Stellantis portfolio, underperforming even the savings accounts! Even the Peugeot family couldn’t look away from this, and in February it was announced that the CEO would join the chairman in leaving the company this summer. The press release was celebrated on the stock market as the stock price rose by more than 6%. However, it should be clear that the problems are much broader than just the CEO. The last decade shows that the entire company would have had its investments better determined by dart monkeys rather than high-paid suits. Peugeot Invest has declared its mission to be an attractive option as a money manager. This dream is currently in disarray. To bring this dream to life, I recommend exploring the following options:

1. Request permission for Euronext (OTCPK:EUXTF, OTCPK:ERNXY) to reduce open interest below the limits, so that more share buybacks can be made. Trading the portfolio at a 60% discount to NAV is the easiest and most attractive investment available to Peugeot Invest during this period. This should be pursued as a first priority. If the requested permission is not granted.
2. Detach the Stellantis (STLA) portion of the wallet. This will make the discount to NAV of the non-Stellantis portion clearer and the trading of the Stellantis portion easier. Both will significantly reduce the discount to net asset value.
3. Simplify the portfolio by switching to investing in diversified ETFs and/or ceasing to make non-listed investments. Both will reduce the chance of overpaying for investments and improve visibility, and both will reduce the discount to net asset value.

If all else fails, why not take the holding company private? Why share failures with the world and open yourself up to semi-annual verbal abuse from stakeholders? With a 60% discount on the company’s net asset value, it was no surprise that questions after their Q4 presentation were solely about their plans to reduce the discount.

No one even asked about the strange change in their focus on ESG investing. I say “curious” not because it is an obvious attempt to distract from their poor performance, but because the “G” stands for governance. Since more than half of the management are members of the Peugeot family, I would like to know what ESG investing means in relation to their company.

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Wallet configuration

The current portfolio consists of 18 stocks and a 0.1% cash portion. Since our last investor letter, we have exited five small positions. We have entered into two new jobs, both in the power/energy services space. We still lean toward small caps and energy/industrial companies.

There wasn’t much movement between sectors. The biggest visible difference is that Peugeot has been moved to the industrial group instead of the financial group.

Top 5 collectibles:

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Company in focus: Basic-Fit

Basic-Fit has become a battleground stock, with opinions differing widely. The past three months have brought some negative news that requires further examination.

The first big news was the indication on the capital markets day that they would slow the pace of their expansion. While the CEO is still targeting the same number of clubs by 2030, he now intends to open 175 clubs instead of 200 per year. Since the fitness industry is in land grab mode, this is unwelcome news. The remaining spots at the table will be chosen by competition, reducing the possibility of expanding further down the line.

Secondly, in December it became clear that Basic-Fit also started offering €20.00 memberships again (only in France at the moment). This is worrying, as we were hoping to see some pricing power through their dominant position in France and the Benelux countries, and this shows the opposite.

The third “blow” came when Planet Fitness (PLNT), the world’s largest fitness center brand, announced its entry into the Basic-Fit market in Spain. Planet Fitness uses a franchise model and offers memberships as cheap as $9.99-14.99. Fortunately, Basic-Fit has a clear first-mover advantage, and I would be reluctant to enter as a franchisee into an environment that carries the risk of a price war. Moreover, Planet Fitness’s ambitions are a bit weak compared to the expected pace. However, it seems clear to me that Basic-Fit will need to move away from a single price strategy and adopt a more flexible pricing approach, allowing fees to be raised in less competitive locations, while offering aggressive discounts in locations where prices are low. Competition must be expelled. Smaller competitors will quickly withdraw, while Planet Fitness and potential franchisees will receive advance warning against moving into Basic-Fit’s key markets.

While my personal thoughts on strategy are clear, management is trying too much of it last Things. It’s good that they are experimenting and innovating, but they clearly don’t seem comfortable in their current situation. A sentiment shared by shareholders, as reflected in the current share price.

So how do I feel about where we are at Basic-Fit? Well, it’s clearly not our best performance. With a 40% decline year-on-year, he is our biggest critic. However, in our estimates, Basic-Fit’s fair value has fallen below its stock price, while other stocks we own are growing in valuation. In our estimates, Basic-Fit at this moment is nominally the biggest opportunity, and we expanded our position post-earnings despite its ugly momentum. While growth is expected to slow next year, this is not all bad: fewer club openings are improving visibility on “true” profitability. As the proportion of mature clubs increases, the average number of members per club will rise, the number of motivated junior members will shrink and capital expenditures will decrease. These three impacts will dramatically improve your cash flow and bottom line.

Finally, it’s not impossible for Basic-Fit to be acquired by another company: since Planet Fitness is looking to expand into Europe, it might make sense for them to make their lives easier and bid for Basic-Fit. It will be my course of action.

General market commentary

Since our last letter to investors, markets have begun to price in smaller interest rate cuts. Everything appears balanced on the surface, with the market pricing in interest rate cuts slowly but in a more solid economy. With this, it appears that the US presidential election year will be an attractive year for stocks in general. Personally, I am now focusing on developments related to the defense industry and trying to understand the real impact of AI in the next five years and beyond. Finally, China is still cheap and should provide plenty of upside opportunities. I’m still circling these topics without finding enough real (and timely!) conviction. Investing is hard sometimes.

Best Regards,

Joost van der Mandel, Director of Pendelhaven Asset Management BV

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Original post

Editor’s note: The summary points for this article were selected by Seeking Alpha editors.