Megatrends help Trans Europe fund
One of the most conspicuous success stories in the European investment fund industry over recent years has, without doubt, been the European equity saga. Assets held in European-domiciled funds that invest in European stocks grew by more than $150bn (E000) (or 312%) between September 1996 and September 1999, and now total well in excess of $200bn, according to Lipper Limited.
The reasons for this newfound interest in Europe are well-known; the single European currency has exorcised the spectre of currency risk for Eurozone transactions, cross-border consolidation continues apace, European stockmarkets have put in encouraging performances and interest rates remain low. As long as none of these factors looks set to fade from sight, European equities seem destined to hold a special place in the investor’s imagination.
Increased demand has led to a broadening of supply – numbers of Europe-focussed equity funds almost doubled between the third quarters of 1996 and 1999 – and, predictably, management groups are jostling with each other for new trade. Which begs the question: in a market where information is readily accessible to all, what makes any one fund rise above the rest? Joint fund managers Felix Lanters and Guido van der Burg think they know the answer.
Their fund, ABN Amro’s Trans Europe Fund, has been the best performing Netherlands-domiciled European equity fund over the last ten, five and three years. The key, claims van der Burg, is in the discipline of approach; refine your technique and stick to it.
Lanters and van der Burg describe their approach as a combination of top-down and bottom-up. They look for what they call megatrends, then search for companies that stand to benefit from them. Considerations taken into account recently have included the ageing population and the problems facing pension providers, the ongoing trend for privatisation, the financing of healthcare and the increasing prevalence of IT services in everyday life.
These themes have pointed up sectors such as telecoms, IT, media and pharmaceuticals, which, with their predictable margins and top-line volume growth, are exactly the sort of sectors that the Trans Europe team are looking for. A glance at the list of the fund’s top ten holdings clearly shows where their faith lies; the five largest holdings are all telecoms stocks (Nokia, Ericsson et al), while the others are dominated by pharmaceuticals.
The search for companies exhibiting long-term growth may be inflexible, but that is not to say that the management team sticks rigidly to certain sectors. Sectors they avoid are those with cyclical stocks, such as raw materials, chemicals and transport, but there is always room for the odd exception. The fund invests in Ryanair, for example, despite its ‘Transport’ tag. “Ryanair has such a perfect business model that it isn’t cyclical like most of its competitors,” says van der Burg. “When the economy’s bad, people turn to Ryanair because they do cheap flights, and when it’s good, more people travel, so it has predictable long term growth”.
The generally stable nature of this approach is reflected in the relatively low rate of turnover of investments within the fund; only about 25-30% of the fund’s holdings are changed in any given year. “When we make the decision to buy or sell a stock,” says van der Burg, “it really is a big deal”.
Despite the fund’s success, van der Burg is the first to admit that the strategy’s rigidity has its drawbacks. Over the year to end September 1999, it relinquished its title of top performer, and slipped to fourth position. “Because of our policy of looking for long term growth, we haven’t perhaps taken as much advantage of the smaller, riskier internet stocks as others have,” says van der Burg. He warns, “If the present growth tails off, the fund could start to underperform”.
The good news though, is that there are no signs of this happening, and last year’s performance rate of 57.6% – healthy by anyone’s reckoning – by no means looks like an unattainable target. “Everything still looks green,” says van der Burg.
So, are there any areas of growth whose shoots are greener than others? Van der Burg cites examples of companies that help banks to automate and become more efficient, such as Logica, or firms involved in internet-shopping – or, companies that apply the almost infinite potential of modern technology to everyday activities. “The future,” he says, “belongs to those companies which make the link between the ‘old’ economy and the ‘new’”.