The leading long/short equity duo on a three-year basis are cautiously tapping into select areas of European equities amid concerns about quality companies becoming expensive.
David Tovey and Simon Hunter, who top the sector for their work on the €625 million BSF European Opportunities Extension fund, said market volatility has hurt the region but not as badly as many generalist investors think.
‘We have not seen a significant shift in data year to date and Europe remains relatively robust, with pockets of strength in consumer-related segments of the economy especially,’ the pair said in an investor update.
‘However, Europe is not immune to global growth concerns and a freezing of credit and liquidity can override any short-term strength. We do not believe we are in a 2008 meltdown scenario.’
While the fund is primarily focused on Europe, regions outside of the mainland comprise the majority holdings. The UK (25.7%) is the largest allocation, while also holding significant overweights in Denmark (18.1%) Switzerland (16.2%) and Sweden (14.9%).
Tovey and Hunter said they are not averse to core Europe, notably the eurozone, as they believe its financial system could be going through a significant strengthening, aided by supportive central bank policies.
‘Banking regulation is significantly tighter than it was, levels of capital are higher, the ECB is more willing and able to provide liquidity and there are more circuit breakers in place to prevent a systemic issue today.’
‘Within this context, we retain a keen eye on valuation. Quality is not cheap in European equities and we will maintain our discipline. We are sticking to companies that offer higher earnings visibility and attractive stock-specific drivers and looking to avoid value traps in highly cyclical businesses at a time of uncertainty.’
Recent portfolio moves saw the duo trim energy exposure, which now accounts for a net short position, compared to a 6% long allocation in the benchmark. This saw the duo sell its position in BG Group and trim its holding in Shell.
The BSF European Opportunities Extension fund returned 10.59% over the three years to the end of February 2016. This compares to an average manager return of 10.25 in the Alt Ucits – Long/Short Equity sector over the same period.