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AAA-rated Bendahan: why my new tilt might surprise

AAA-rated Bendahan: why my new tilt might surprise

Eleva Capital’s Eric Bendahan holds a strong value tilt and backs financials as the sector to watch, he told Citywire Selector.

The Citywire AAA-rated manager’s Eleva European Selection fund has a hard bias towards value stocks, which represent around 59% of the portfolio.

The Paris-based fund manager said this may come as a surprise to many of his investors as he typically has been known for his preference for growth companies.

‘We're always opportunistic but through my career I've been much more exposed towards growth companies, so some clients even identify me as a growth manager.’

However, Bendahan is currently finding more opportunities and ideas in the value space.

This is with a focus on companies which have high free cash flow, particularly in the financials sector, where the manager has been adding exposure over the last six months.

Within his investment approach, Bendahan defines value stocks as a 30% discount to the market in terms of P/E of free cash flow yield.

Betting on banks

Banks account for one of the fund’s largest overweights but Bendahan said this view is not dictated by a top-down view on rates. He said it can be dangerous to try to time an upturn in interest rates.

'What we see is a rising interest rate being more of an icing on the cake for the companies we invest in rather than the main reason behind our investment.

‘But, if I were to bet on the normalisation of interest rates there would be a very significant upside on some of the stocks that we cover.’

Fundamentally, the picture for banks looks better than it has in the past, he said, with long-term growth picking up and commission income increasing.

This is despite margins suffering from low level of interest rates, but Bendahan said they are not deteriorating any further. All this means there is more room for upside, he said.

The top position in the fund is Austrian firm Erste Bank, which has been a long-standing holding within the portfolio. ‘It's been a good performer but we still see significant upside.’

He said this is partly a proxy play on Europe's emerging markets as it has a strong eastern European footprint.

‘All the fundamentals are improving and are present in central and Eastern Europe, in regions that have much lower penetration of banking product so there is a catch up potential and on top of that, interest rates in these regions are moving up already.

'Czech rates have moved up and so have Romania’s so the kind of lack of momentum on rates, which has been an issue for banks for a while, is no longer the case in the region.’

Overall, Bendahan plans to continue to scale up the fund’s existing financials exposure, with more additions to the stock of companies.

‘We still feel that financials is one of the rare areas of the market where valuations are quite low, earnings momentum is picking up and as time goes by, we are approaching normalisation of central bank policies.’

Geographic footprint

In terms of geographical exposure, the European fund is well-exposed to core Europe, including Austria, the Netherland and Germany. He is underweight Switzerland and the UK for valuation considerations.

Bendahan finds more ideas in domestically-oriented companies as there is a greater catch-up potential, while most international companies are making results which are at an all-time high today, he said.

‘We're talking about financials where we see a normalisation, some domestic sectors in the construction space, telecoms to some extent still have quite a bit of catching up to do versus where they were pre-crisis.

'We feel that it is a scenario where there is a greater upside on earnings and not necessarily a premium in terms of valuations because investors have tended to prefer the international companies.

Over three years, the Eleva European Selection Fund has returned 34.48% in euro terms. This compares to Citywire-assigned benchmark, FTSE World Europe TR EUR’s performance of 18.59% over the same timeframe.

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