Citywire AAA-rated manager Daniel Hemmant is focusing his efforts on highly consolidated industries in order to avoid the difficulties created for stocks operating in fragmented sectors.
Hemmant, who runs the BNP Paribas L1 Equity Europe Growth C CParvest Equity Europe Growth CC fund, said he has prioritised efforts to find out dynamics of industries rather than other headline figures, such as GDP numbers.
‘We don’t invest based on macroeconomic forecasts,’ he argues, noting that forecasts are usually wrong, and even if they are accurate, are of questionable use for investors.
‘It’s not clear if there’s any point in doing this. The GDP of an economy and the share prices of the markets don’t have any clear correlation and, in fact, are slightly negative,’ he adds.
Instead, Hemmant said he has adopted the Herfindahl-Hirschman Index, which measures the concentration of industries, when it comes to stock selection.
‘We want the industry to be consolidated, and ideally going through a process of consolidation. In an industry which is sufficiently consolidated, you have companies with pricing power, and that’s pretty attractive.’
This, Hemmant, said has seen him avoid markets such as the dental implants sector, which Hemmant said is an example of a market being too fragmented.
‘Straumann and Nobel Biocare showed very good revenue and earnings growth, and the stock was a complete market darling,’ he said.
‘The problem was after 2005, the level of concentration fell very rapidly, and that told us barriers to entry simply aren’t high enough. Since then margins have gone down and down.’
In addition, he said he is avoiding asset managers, which Hemmant branded a ‘horribly fragmented industry’.
Conversely, this approach has worked well in the beer and drinks industry, Hemmant said. Here Hemmant witnessed a growth in margins along with industry concentration.
‘In beer we’ve held various positions in SAB Miller, Carlsberg, In Bev over the past 5 years, with exception of Heineken.’
‘They’re all different, Carlsberg is highly exposed to Russia, InBev is in Brazil and US, while SAB Miller has a very strong emerging market franchise.’
Hemmant added he has also looked for contrarian bets, while being mindful of overpaying for a stock.
He said: ‘We guard against this in three ways, one is the valuation work, being disciplined, and finding industries that are going through the process of consolidation, and the final way is to buy straw hats in winter – essentially looking to buy these companies when they’re out of favour for whatever transient reasons.’
In the three years to the end of April 2013, the Parvest Equity Europe Growth CC returned 37.58% against its Citywire benchmark, the FTSE World Europe TR EUR, which rose 25.01% in US dollar terms.