We spoke to Adrian Bignell at Invesco Perpetual about his approach to investing in Europe. He manages the European Opportunities Fund, a focused, smaller fund that can trade more aggressively than other European investment funds.
How would you describe the investment approach of the European Opportunities Fund?
The fund is a high conviction / high alpha fund that is prepared to take large sector and country positions based on my level of conviction. The fund will tend to hold 70-80 stocks with the largest positions rarely exceeding 5 per cent. The top ten represent 29 per cent of the portfolio at the time of writing (6 December).
I have a style-neutral approach but the natural skew is towards growth and for this reason the fund has a bias towards small/mid caps (defined as having a market capitalisation of less than €6bn).
What are the main advantages of this style of fund management?
Style neutrality enables the fund to adapt to the macro and to be flexible over the long term. An example of this can be seen at the start of the year when I felt markets had rallied ahead of fundamentals through December 09 and into January 2010. I took profits and held 10 per cent cash whilst the markets consolidated downwards at the start of the year.
Having an expertise in small and mid caps provides me with a wider perspective on the economy and also with a steady stream of small mid cap growth stories that many similar alpha funds only pick up later on.
The funds size (just under £20m) is a distinct advantage in remaining nimble in trading terms - allowing the fund to take positions and exit interesting micro caps as well as small caps.
Over the last 12 months what have been some of the key investment areas for the European Opportunities Fund?
We have remained underweight in certain defensive sectors that have not moved as many analysts thought (oil and gas, utilities and financials). Whilst we were a little slow to embrace the chemicals, autos and industrial sectors, the fund bought into a number of cheap small and mid cap growth stocks that have delivered good earnings upgrades and subsequent performance.
For example, names such as Brenntag (Europe’s number one in chemical distribution via trucks) look to have a very healthy medium term outlook as they take market share and re-invest cash flows into Asia and Latin America.
Oil service names continue to make progress as evidence emerges that large oil exploration and production budgets are being revised up on a healthy oil price and imminent supply shortages look to be putting pricing power back in the hands of the service companies.
Luxury goods are a sector that has roared ahead on the back of a strong emerging market consumer.
Government debt crises and slow economic growth have affected several European economies, where do you currently see the investment potential in Europe?
The currency straight jacket that binds many of the southern European nations and prohibits them from devaluing works positively for the more export oriented northern European countries such as Germany, Austria, Holland and Finland. The weakness of the euro gives their manufacturing base a tail wind
to export into the faster growing BRIC (Brazil, Russia, India, China) economies.
Whilst Sweden, Norway and Denmark are not in the euro, their capacity to export into areas of healthy global demand (via capital goods, mining equipment, oil services) provide their economies with an avenue of growth that has buoyed employment and business confidence.
Such has been the hysteria and nervousness around the ailing PIIGS (Portugal, Ireland, Italy, Greece, Spain) economies that interesting value opportunities are opening up as babies are thrown out with the bath water. We haven’t allocated much of the fund to these value stocks yet, as we are wary of a further rise in unemployment and a weak domestic credit impulse. But at some point, we believe buyers will return to benefit from high dividends and strong cashflows.
How do you see the market recovery panning-out across Europe into 2011?
With the PIIGS still focusing on deleveraging and internal devaluations (via lower wage growth and lower rental costs), the outlook for growth is weak. However, Northern Europe is benefiting from a weak euro, more moderate deleveraging and a manufacturing base that is able to sell into a vibrant emerging world.
So it looks as if a two speed Europe will persist for the time being and careful stock and country selection will remain key. With growth scarce, bottom up secular growth stocks should continue to command a premium and here our exposure to this space should stand us in good stead going forward.
If economic growth surprise on the upside in the near term, I would anticipate asset allocators feeling the pressure to switch out of low yielding bonds and cash into equities. This could help the market deliver good returns in 2011.
The value of investments and any income from them will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
Where Adrian Bignell has expressed opinions, they are based on current market conditions (6 December 2010) and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual investment professionals. Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell.
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