With the looming threat of a Brexit and wider political uncertainty at play, Citywire Selector took a closer look at how the leading lights are dealing with this difficulties and what themes they are following.
Selective exposure to continental European financial companies has been one of the keys to success for John Surplice, co-manager of Invesco’s Pan European Focus Equity fund, over the past three years.
Embracing certain banks and insurance firms that were being routinely shunned by many market participants proved to be a masterstroke especially at a time when canny stock selection made the difference between success and failure.
‘We find the banking sector to be particularly attractive as it offers a good combination of low valuations and earnings recovery potential,’ he says. ‘We also see significantly improved capital positions in the sector compared with the pre-financial crisis period.’
The disciplined, valuation-driven investment approach followed by Surplice and his fellow managers meant they missed some performance benefits attributed to momentum trades, but it is not anything they regret.
‘Ultimately, this has been offset by our focus on valuation and the performance benefits achieved from what is considered as value or GARP holdings,’ he says. ‘Looking back, we would not have acted in a materially different way.’
Surplice finds valuation anomalies typically arise from secular, cyclical or company-specific factors. The aim is to exploit any such anomaly and invest in companies with the most attractive risk/reward profiles over a three to five-year horizon.
Bankinter is an example of a stock that has done well for the fund. In the wake of the European sovereign debt crisis, the Spanish lender’s valuation looked very cheap as it was penalised for being based in a European peripheral market.
However, the fund managers’ believed the bank had a strong capital position, as well as very limited exposure to the Spanish real estate/development market, which was highly problematic at the time.
‘This offered an attractive opportunity to us,’ says Surplice. ‘What we saw was a fundamentally sound bank that was trading at very depressed valuations. The market eventually caught up with fundamentals and the share price moved towards fair value.’
International Consolidated Airlines Group has been another strong name. Formed in January 2011 as a result of the merger of British Airways and Iberia, it has benefited from a secular growth trend in global air-passenger traffic and a number of company-specific elements.
‘These include its strong strategic position at capacity-constrained London Heathrow and dominance on Atlantic routes, the restoration of profitability at Iberia with aggressive restructuring, merger synergies and growth from fully-consolidated low-cost airlines,’ Surplice says.
Meanwhile, Pandora, the charm bracelet jewellery manufacturer, has been one of the most successful overweight positions in recent years for Michael Barakos, a European equities portfolio manager at JP Morgan Asset Management.
‘The stock is up more than 25 times from its lows four-and-a-half years ago and we’ve been overweight it for most of that appreciation,’ says Barakos.
‘It has continued to surprise positively in terms of better volumes, pricing and lower input costs, while returning plenty of excess capital generated from strong free cash flows to shareholders through dividends and share buy-backs.’
More recently, Barakos has focused on attractive deep value names, with commodity trading and mining company Glencore, being a prime example of stock in which he went overweight for the first time this year. This was due to its wide-ranging restructuring programme.
‘The abolishment of the dividend, a material capital increase and significant asset disposals were all much-needed moves to address its balance sheet weakness,’ he says. ‘The stock has doubled already since purchase.’
Barakos attributes his fund’s performance over the past three years to its success in making significant moves into attractively valued stocks with strong momentum. ‘When assessing value it’s crucial to avoid cheap stocks that are cheap for a good reason,’ he says.
When judging quality he not only analyses financial attributes such as management and earnings, but also momentum as this gives credibility to growth, and more closely reflects actual delivered growth than historic or predicted growth rates.
‘The flip side is just as important and we look to go underweight stocks that are expensive, low quality and with poor momentum,’ he says.
‘Exploiting both attractive and unattractive stock ideas simultaneously is something we’ve done consistently well for our clients in the JPM Europe Equity Plus fund over the past few years and over the longer-term.’
These comments originally appeared in a supplement published alongside the April edition of Citywire Selector magazine.