The European utilities market is showing signs of life and veteran investor John Bennett has moved to an overweight after several years of avoiding the sector.
In an investor update, the Citywire AAA-rated manager stressed he is not bullish on the sector but has increased bets across his strategies.
Bennett, who runs six European equity funds at Henderson including the Henderson HF Pan European Alpha, has increased exposure to 6% in most portfolios, which compares to a typical benchmark weighting of 4% for utilities.
‘I’m not bullish on utilities but I am no longer bearish. We are closing the bear bet on European utilities. It is an ugly place and definitely a contrarian place to be, so we are moving overweight there,’ he said.
‘It is not a big bet there, we would see it as a decent bet when we get to 10% or between 8-10%. When you see it getting to 8% or above then we are making an active decision.’
‘It may get there it may not, we have enough ingredients to close the bear bet, if you look at the bear position we had zero exposure for eight years. It was a lovely generator of alpha because it was a good place not to be. But now we think it is time to call off the dogs on utilities.’
Bennett said he would like to get to 10% or beyond in his funds but that would take a number of aspects improving, which he has yet to see.
Focused on pharma
Elsewhere in his funds, Bennett said the major theme continues to be pharmaceuticals, which he has championed for a number of years.
‘It is a boring story but it is only boring because we have been saying it for a long time. We have entered year five of our pharmaceutical play and I would say be prepared for more boredom as I do believe this is a 10-to-15 year secular theme.’
‘They look expensive compared to where they were five years ago but you have to stretch that, they are cheap compared to where they were 30 years ago and also where they were in the early 90s. Also, if you look at the late 90s, they were around 30x earnings, which was very expensive.’
While Bennett said there was room for multiples to rise, especially against a deflationary backdrop as people pile into defensive stocks, he did not envision this as the base case for the sector.
‘I don’t think they are expensive to where they were four or five years ago when the sector troughed. I think that was an artificial trough and it was slightly hysterical.’
‘People thought they would never grow again, they would never find drugs, and look at the front pages and Forbes magazine has Novartis chief executive on the front cover. That’s the feast and famine of our industry, there is certainly more interest here.’
In the European equity sector, Bennett has returned 51.3% across his funds on a three year timeframe to the end of May 2014. This is while the average manager in the sector returned 25.31% over the same period.