Managers pitch hidden gem funds in Paris

Two months before the first round of the French presidential election, InvestmentEurope stopped in Paris on the occasion of the Paris Hidden Gems Roundtable that took place at the Hotel Raphael on 28 February 2017.

The event, which has gathered some 18 French fund selectors, has seen Eurizon Capital, T.Rowe Price, Investec, Seilern Investment Management and Artemis presenting long-only as well as absolute return strategies.

Eurizon Capital and the elections in Europe

Eurizon Capital’s chief investment officer Emiliano Laruccia introduced the Italian firm’s contrarian approach on equity and its low volatility absolute return take on emerging market bonds to French investors.

Laruccia highlighted a number of macro economic scenarios. Regarding forthcoming elections in Europe, he said Eurizon Capital does not believe anti-Europe political parties would gain the power in the short term.

Another ending to European elections would be the winning of populist parties in France, Germany, the Netherlands and Italy. Coalitions will be then seen as cordon fences.

Eurizon Capital’s CIO argued central banks will be “key players” this year, highlighting a possible tapering from the European Central Bank as from January 2018. Laruccia said the fight between the Fed and Donald Trump should be monitored closely.

Eurizon Capital’s CIO outlined the flexible approach of the Eurizon EasyFund Azioni Strategia Flessibile fund invested between 50% and 100% in US and European equities, increasing positions when markets fall. As of 31 January 2017, the equity exposure of the fund was 50.56% with a 3.6% allocation to European stocks.

Laruccia presented the Epsilon Fund Emerging Bond Total Return strategy which invests mainly in short-term bond instruments issued by governments and companies in emerging markets with currencies generally hedged in euros, a volatility level less than 2% and yield to maturity higher than 3%.

Sovereign bonds represented 70.65% of the portfolio and largest EM market exposures were Brazil, India and China as of end-January 2017.

T.Rowe Price’s unconstrained bond approach

T.Rowe Price’s global fixed income portfolio specialist Stéphane Fertat discussed the role of fixed income in the current economic environment.

He assessed the role of dividend is at stake in today’s fixed income world. Most short-duration developed market govies do no longer appear as a safe haven and return negative yields.

“The US Treasury bond is losing its safe haven role. The US outstanding debt is set to rise while China heavily trims its US Treasuries holdings since June 2016. China is disappearing from the US treasury buy market,” Fertat said.

Fertat who presented the T.Rowe Price Global Unconstrained Bond fund added that traditional allocation in fixed income influenced by benchmark weights and consisting of holding mainly long positions in portfolios makes no sense today.

The T.Rowe Price’s unconstrained bond approach seeks stability in performance, capital preservation and diversification. The fund’s holdings can be classified in three categories : return seeking positions, core stable positions and defensive positions.

Examples of defensive positions include the purchase of long high quality govies such as 10-year German Bunds and put options as well as the sale of corporate bond indices and specific credit issuers.

Fertat pointed out the T.Rowe Price’s global unconstrained bond fund does not carry a currency risk and that the share of high yield corporate and emerging market bonds in the fund is not exceeding 30%.

“It is not certain that the fixed income universe could provide huge returns over the coming years but when equities will fall, bond returns will be here,” Fertat explained. “If you want yield, you can invest in high yield bonds but beware of the correlation with equity markets, he later added.

Investec, the case for Europe recovery

Rajeev Bahl, European regional analyst within the 4Factor equity team of Investec, gave his outlook on European equities.

He said that if earnings in European equities are still depressed, a turning point is coming in the asset class.

Bahl argued the European recovery taking place leads to corporate earnings recovery despite the negative impact from the downturn in commodity prices in 2015-2016.

According to him, continuous improving demand in automobile in several European countries sales illustrates the recovery even though sales have not reached previous peaks yet.

Bahl said investments in European equities are currently timely as company balance sheets are improving and current valuation multiples are mid-range relative to history.

Investec’s European regional analyst listed strategy, value, earnings and technicals as the four drivers of the 4Factor investment process before he exposed its implementation within the Investec GSF European Equity Fund.

The fund currently holds, among others, stocks of companies which benefit from a global competitive advantage such as SAP and Pernod Ricard and companies with differentiated offering like Maisons du Monde and Just Eat.

Two stocks Bahl termed hidden gems were Italian firm DiaSorin purchased in November 2015 and German tech company Siemens bought in February 2016.

Seilern IM’s 60-70 stock selection 

Seilern Investment Management’s chief investment officer and fund manager Raphael Pitoun outlined the strategy behind Seilern’s Stryx fund range. He described the four pillars of the UK boutique’s stock selection.

A first criteria is a sustainable and scalable business model with competitive advantage and high return on capital. MasterCard and Moody’s remain among stocks the manager invests in.

A second component is a proven growth track record. Seilern IM looks for companies that are highly predictable and enjoy double digit earnings over a cycle such as Lindt and Colgate. The firm avoids young and new born firms like Facebook. On average companies selected in Stryx funds have been launched in 1944 versus 1999 in the S&P 500.

Pitoun highlighted market cap of over $3bn, listing on markets of OECD country members and transparency accounting as the third criteria. Lastly, Seilern IM considers the companies’ long-term strategies and the motivation of their management team.

“Firms announcing high dividends and heavy moves are risky. We don’t invest in these firms,” explained Seilern IM’s chief investment officer.

Seilern IM’s investment universe focuses on 60 to 70 stocks that match the firm’s criteria.

It excludes the following sectors: utilities, banks and telecoms, commodities, oil and gas, airlines, heavy industrials and automotive, banks and insurance. These industries are not so predictable, transparent or are not matching the pricing power criteria of Seilern IM, Pitoun argued.

Detailing the stock selection’s exclusions, Pitoun quoted the example of a company that has an executive board member who cannot travel to the United States, the main market of the firm, since more than ten years.

Artemis backs European large cap value stocks

For Paul Casson, fund manager of the Artemis Pan-European Absolute Return fund, the current focus on politics sends in investors in the wrong direction. “You forget to make money at some point,” he added.

Highlighting that the fund is neither market neutral nor sector neutral, Casson sees a number of opportunities in European large cap value stocks he placed among current cheapest and most unliked assets available in the market.

Large value caps have been underperforming since the financial crisis and their earnings have reached 12 year lows while small and mid-cap earnings almost achieve all-time highs earnings.

But in Casson’s view, old winners are becoming losers and old losers are becoming winners.

He said earnings of European large cap stocks are likely to rise for the first time in five years and the relative performance of European large cap equity funds applying a value style is picking up since the middle of 2016, after they suffered losses during a couple of years.

Companies the manager considers for shorts usually burn cash and have a rising net debt.

Casson is currently adding firms from the consumers staples sector to his short book. He also goes short highly valued industrial companies that face a period of much weaker growth.

Global container shipping company AP Moller – Maersk was the top long position of the fund (3.2%) as of end of January.

Casson notably argued that Maersk was playing an active role in the container market consolidating and therefore generate substantial synergies.

ABOUT THE AUTHOR
Adrien Paredes-Vanheule
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