Diverging economic, monetary cycles offer opportunities

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With the monetary and economic cycles in the major investment zones growing ever further apart, UBP’s European Equities team is adjusting its portfolio by increasing its weighting in financials as well as in companies with exposure to the US economic recovery.

Given the economic environment and a highly accommodative ECB, the management team recently adjusted some of its investment themes in its UBAM – Europe Equity fund. After trimming its exposures to mid-caps and companies that are restructuring, which have both been major themes in the portfolio for several years in line with the team’s long-term convictions, the team recently rolled out new investment ideas.

“For several weeks now, we have been growing our exposure to some European cyclicals. This means an overall increase in the weighting of financials but we’ve been highly selective in doing so. In real terms, this means we’ve boosted our positions in the sector’s more defensive profiles, for example HSBC, ING, AXA and Swedbank AB, whilst starkly reducing the exposure to peripheral banking assets,” explains Jean-Luc Eyssautier, senior Investment specialist based in London.

Supportive ECB

This  decision was spurred on in the wake of European monetary policy, which is becoming increasingly accommodative; there is the probability that the ECB will introduce an intensive asset-buying programme over the coming quarters which is liable to boost the sector. Eyssautier continues, “However, we wanted to focus on the quality of the underlying assets. Given that some uncertainties on growth remain, and the fact that the economic recovery is running out of steam in some of the southern European countries, we have recently reduced our exposure to financials in Spain and Italy.”

US Momentum

The other theme the team started implementing recently focuses on European companies that are particularly exposed to the US economy. The US economic cycle is well ahead of its European counterpart and also favours households’ confidence and spending. Eyssautier believes that, “…there’s a significant inflexion point in the United States at the moment, with low energy and food costs. Coupled with robust economic fundamentals, it means that these trends are boosting household demand by reducing the cost of living.”

Names such as Nestlé, AB InBev, Deutsche Post, Diageo and Wolseley play to this investment theme, as a significant amount of their revenues come from the North American market. Deutsche Post is an interesting example, as it is one of the companies benefitting from the boom in e-commerce.

Deutsche Post is the biggest shareholder in the US company, DHL, and has seen its business volume develop significantly in recent years, moving away from that of a traditional postal company to a package delivery company. Moreover, many of these export companies are becoming more competitive as a result of the euro weakening against the dollar, itself a result of monetary policies on both sides of the Atlantic.

These strategies form an integral part of the active and pragmatic process that UBP’s European Equities team applies. “Our fund managers’ aim is not to carry out large-scale, untargeted stock rotations in response to a trend. On the contrary: it’s a question of evolving the portfolio through gradual, thematic adjustments in an effort to adapt to the economic environment.

It’s only with this sort of philosophy that active managers will outperform benchmark-led management. In a universe of over 600 funds, the constant stability of the UBAM – Europe Equity fund’s outperformance has been a source of great pride for the management team ever since they arrived at the end of November 2010,” concludes Eyssautier.

“Our clients don’t want us to gamble with the fund’s assets based on a unilateral opinion about changes to policy or regulations, or about an economic announcements such as that made by the ECB on 4 December. Our collegial management style focuses on generating regular outperformances every year. In our opinion, this is only possible by making slight adjustments to the portfolio, which is made up of a maximum of seventy names, mostly comprising five or six investment themes that we have identified,” says Eyssautier.

For UBP’s European Equities team, long-term investments are built on a pragmatic approach to financial markets, a dispassionate, bottom-up stock-selection and the identification of investment themes. “We’re not bound by any style and we always keep in mind that we are investing our clients’ assets.

Our approach blocks out sentimentality as regards the management teams and the companies we have in our portfolio. This means we can be highly reactive, as we were, for example, during the correction in Q1,” It is by having followed this investment philosophy that the five members of UBP’s European equities management team were able to celebrate four consecutive years of annual outperformance on 30 November 2014.

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