Consumer staples have become too expensive, where as consumer cyclicals and financials, particularly banks, are now the sectors for value investors to bet on.
Speaking to Citywire Selector, Barakos, who currently has 29.4% of the portfolio allocated to financials, said the past few months have seen a significant change in the fund's banking exposure, which is currently an overweight in the portfolio.
‘Going into September we significantly changed our position in the banks, having got the basic resources right in Q1. We called the banks very well and still continue to add to those positions.’
Barakos currently has three financial companies in the top ten holdings of the portfolio, these includes are HSBC (4.2%), Allianz (2.1%) and Banco Santander (2.0%).
'The fund has been underweight the financial sector for quite a while and it is the first time in years we have overweighted the sector.'
‘We are about 2% overweight financials, but that’s an overweight against a value benchmark - the MSCI Europe Value - rather than the broad market. The broad market is around 10%, but the value index is 20% banks, so actually we have 22% absolute weight in banks.’
Leaving the safe havens
Barakos said he is currently focusing on banks and cyclical stocks, however, he believes defensive sectors are best avoided. He highlighted consumer staples, which he currently has 2.9% exposure to.
‘Food producers, beverage companies, tobacco companies; these were the things that were fantastic stocks for a number of years. They were brilliant safe havens but there has been a huge amount of volatility in the market in the last 12 months, which has made them a great place to hide.’
‘No doubt names in that sector are still high quality, they have been low volatility names, stable revenue streams, stable earnings streams and typically quite geared into emerging markets which have recovered strongly in the last year.’
Barakos said the combination of consensus and forecasted discounted cash flow means investors would reverse at a discount rate of 1.5% into perpetuity, a risk he is not prepared to take.
He added: ‘Consumer staples got too expensive, I accept the risk ahead is negative, but that’s not enough of a risk premium for my liking in the long term.’
Barakos said almost anything in the cyclical sector looks interesting, namely automobiles or capital goods names in the industrial space. He said the fund is overweight both areas versus the index weight.
The JPM Europe Strategic Value fund returned 17.04% in euro terms over the three years to the end of September 2016. This compares with a 12.06% rise by its Citywire-assigned benchmark, the MSCI Europe Value TR EUR, over the same time frame.