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We want more volatility, say Brandes value duo

We want more volatility, say Brandes value duo

The busy calendar of European elections could create huge volatility and bring with it a host of attractive entry points for savvy value investors.

That is according to the team who run the Brandes European Value fund, previously known as the Brandes European Equity fund. The strategy was overhauled in 2015, in order to emphasise the value-focused investment process.

Speaking to Citywire Selector, Luiz Sauerbronn and John Otis, who oversee the fund, said they are hopeful that 2017 will bring market uncertainty.

'We are hoping for a lot of volatility because it’s actually a friend of long term investors. Most investors think volatility is a risk and they are afraid when volatility goes up, as they think the investment is getting riskier.

'A lot of academic books will tell you that volatility is a measure of risk, we think that’s really naïve. Volatility is an opportunity as long as you have a long-term investment horizon,' Sauerbronn said.

The duo pointed to the series of potentially volatile political events in Europe this year and the team is preparing to capitalise where it can.

'There’s the negotiation of Brexit, which is an exciting prospect for us. We like to think we have a cooler mind, when people get emotional, the market gets emotional. This provides us with opportunities to invest.

'We can lock in attractive discounts and that’s what excites us. Buying good companies that are very attractively priced, then being patient with letting the market eventually recognise the value of the business.'

Attractive valuations

The fund currently has 13.6% allocated to the consumer staples sector along with a 31.6% exposed to UK investments. In addition to this, the fund also holds WM Morrisons and Tesco in its top ten positions.

The duo said this ‘cooler mind’ allowed them to invest in UK grocers, which are recently unpopular among investors and out of favour in the wider market.

'After the financial crisis, the big grocers were too short-term oriented, they allowed discounters to gain share and establish a big price differential between them.

'They lost share and faced the threat of the e-commerce phenomena, with companies like Ocado coming in, which meant they were being attacked from both sides.'

Despite this, the pair said these companies have advantages over newer players, particularly due to better locations and more real estate.

'We feel there is a turnaround, the grocers have shown this in previous cycles and we have seen it take place in countries like the US.

'We were able to buy the UK grocers at prices that reflected a very negative scenario. More importantly, they were at a price that we could afford to be wrong with and it still turn out okay. The risk reward to invest in those companies and the price we were offered was extremely attractive,' Sauerbronn added.

The Brandes European Value fund returned 31.38% in euro terms over the three years to the end of January 2017. This compares with a 22.31% rise by its benchmark, the MSCI Europe TR USD, over the same time period.

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