Numbers of European equity fund launches have risen sharply recently. More than 23% of all new equity funds launched across Europe over the last year-and-a-half have been Europe-focused, compared with a figure of 16% for the previous 18 months. The reasons for this upsurge in interest are not difficult to fathom. The health of the European economy relative to other regions, along with the opportunities arising from the introduction of the single European currency, has made European equities the sine qua non of global investment. But in such a fiercely competitive arena, what is it that sets a fund apart from its rivals?
One fund that has met with conspicuous success in recent years is Newton Fund Managers’ Continental European Fund. A sub-fund of the 12-spoke, Jersey-based Newton Universal Growth Funds umbrella, Continental European Equity has one of the best three-year performance track records in its universe. Posting performance of 103%, it has boasted 12-month performance figures of 10% or more 92% of the time. It also took first place in the Europe ex-UK category at both Standard & Poor’s Micropal’s and Lipper’s 1998 awards.
Using a global thematic approach, fund manager Keiran Gallagher’s top-down strategy focuses on stocks in sectors that he believes have yet to live up to their potential. As a result, one area where the fund is overweight is in the consumer services and retail sector. Not only is consumer confidence in Europe healthy, but Gallagher also believes that the retailers could be about to follow in the footsteps of the banking sector by expanding beyond their domestic borders and gaining a greater share of the European market through mergers and acquisitions.
The fund’s other key sector is telecoms. Gallagher favours those companies that are also internet service providers. “The internet still has quite low penetration in some European countries,” he says. “And while the large telecoms companies have as much as a 70% share of the ISP market in those countries, they’re still undervalued. The market is still growing rapidly, and we expect those companies to receive more revenue from data traffic than from voice traffic within the next five years."
But if the telecoms sector still has a lot of life left in it, one area that has recently enjoyed an upsurge in popularity but that Gallagher sees as having peaked is the pharmaceutical sector. “Growth is down to around 5%, and governments have been cutting prices and restricting drug usage to cap healthcare spending,” he explains. “Also, given that several companies have recently issued profit warnings, and valuations are still high, we think an underweight stance is appropriate.”
Due to their steady demand, the consumer staple and tobacco sectors can be useful when weathering economic storms. But the relative stability of the global economy has, believes Gallagher, made this case less compelling. Moreover, the introduction of the euro will have an as yet unquantifiable impact on pricing. A recent study by Dresdner Kleinwort Benson found that, while there is a range of about 4% in the price of a basket of consumer goods in the US, prices across the EU member states vary by more than 20%. Some large companies have already started acting to level off their pricing policies by lowering prices in the more expensive countries while simultaneously increasing prices in the cheaper markets. “Companies that try to raise their prices could be vulnerable to competition from own-label suppliers, so the big, established suppliers could see their market share come under intense pressure over the coming months,” warns Gallagher. “In view of the opaque earnings outlook, we’re happy to stay underweight.”
But market strategies tend to be based on statistics, and statistics, as any politician will confirm, can be, well, “wrong”. Even the shrewdest investment guru can fall foul of un-foreseen events - just ask George Soros about his Russian mishap. So, leaving sector analysis aside, what are the fund’s guiding principles?
“I tend to characterise our investment style as ‘growth at a reasonable price’,” says Gallagher. “So, we wouldn’t expect to be in the top quartile during a quarter when cyclical stocks post such phenomenal performance.” This is not to say, though, that the principle is treated as dogma. “We do occasionally make cyclical purchases, but,” he qualifies, “when we do, the companies have to fulfil our quality and growth criteria, and they’re pretty stringent. We won’t buy a stock we don’t believe in long term just because it could advance in the short term.” John Grainger