Scandinavia is hot. For the moment

Consistent growth is making Finland, Sweden and Norway look impressive. By Alison Eadie
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Morgan Grenfell's European Growth Trust has a somewhat freewheeling approach to investment. It does not try to outperform stock market indices, but looks for value wherever it can be found on the Continent and, now and then, in the UK.

The result has been impressive. The pounds 640m fund, a unit trust that can be invested in a PEP, has outperformed its peers since it was launched in 1988, according to Micropal.

It is first in the European sector over the last five years and second over one year, behind Europa, Morgan Grenfell's European small companies fund. The search for value means whole countries and sectors can be in or out of favour.

At the moment Scandinavia is in, particularly Finland. A hefty 40 per cent of the fund is invested in Norway, Sweden and Finland.

Peter Young, manager of European Growth, says good-quality, non-cyclical growth companies in Finland are selling at prices of only seven to eight times this year's expected earnings. Cyclical stocks such as paper are selling on only five times this year's earnings. By contrast German stocks are selling on 15 times 1996 earnings and French stocks on 13.5 times.

Although Mr Young accepts that German and French stocks are better value than they were - their price-earnings ratios are usually higher - he is wary. For the past year, the fund has held only two stocks in Germany. Its total holdings presently number 65 and 80 is the maximum.

The fund's flexibility is its strength. Mr Young points out that European stock markets are not as developed as those in the UK and US, and information flow is a much more hit-and-miss affair. There are therefore bigger anomalies to be found in valuations of companies.

Fundamental research and company visits are the cornerstone of European Growth's approach. Although information is not automatically dished out, as in the UK, through ever more frequent trading statements, it can still be ferreted out.

Mr Young says Continental companies often give large shareholders information that UK companies would not divulge. Their interpretation of insider trading laws and the need to treat all investors equally is different. Instead of the UK approach that all shareholders must be told if one is told, Continentals will answer directly to the questioner but feel no obligation to inform the rest. If anyone else were to ask, they would also be told.

The advantage of superior knowledge means there is a temptation to overweight the fund when the opportunities look good. To minimise the price risk, no more than 30 per cent of assets are allocated to one country and no more than 8 per cent to one stock, says Mr Young.

Only two holdings are allowed to reach the 8 per cent ceiling and both must be easily tradeable. As with countries, the fund dips in and out of sectors. It has virtually nothing in the consumer sector at the moment and very little in oil other than a couple of Russian stocks. Two years ago it was heavily weighted in luxury goods and now has a high proportion of computer and high-tech stocks.

Mr Young explains: "As a house we don't like funds with restricted mandates. We like the fund manager to roam, to find value."

High-tech favourites include the Finnish telecommunications company Nokia - one of the 8 per cent stocks - and German software company SAP.

The fund topped up on its Nokia holdings when the price recently halved from its peak, and even at prevailing prices is showing a fivefold gain on the purchase price.

SAP has similarly suffered a share-price bashing after one quarter's bad results. Mr Young points out: "We are in a good position to buy when panic selling sets in as we know the companies so well." SAP's shares, despite their setback, have increased tenfold since the fund first bought them.

Finding value can mean smallish holdings suddenly become very big ones. Mr Young this month found himself selling a large chunk of British Biotech, the fund's only UK holding, even though he believes the share price will continue heading north.

Having bought at an average price of pounds 5 a share, the fund took profits at close to pounds l8.

The spectacular and sudden rise in price meant British Biotech represented 13 per cent of the fund's assets. This is against unit trust (10 per cent maximum per stock) and Morgan Grenfell's own rules, so the holding was trimmed to 5 per cent of assets.

Mr Young dismisses fears that its price rise has been overdone. "Forget where it has been," he cautions. "Investment must always be forward-looking."

As well as successes, there have been disappointments. EVC (European Vinyls Corporation), the joint venture between ICI and Enichem that floated on the Amsterdam stock market in November 1994, has not lived up to expectations. It is presently trading around 50 guilders against an issue price of 77 guilders.

European Growth's eclectic style does not lend itself to narrow specialisms. As a result Morgan Grenfell's 14-strong European team are all generalists. The approach is helpful in controlling risk, says Mr Young.

There is no over-dependency on one person and investment decisions are subject to peer review rather than review by a senior person who may not know the markets as well.

Valuation methods involve looking at balance sheets, free cash flows, price-earnings ratios and other standard analytical tools. Much hangs on whether management is telling a believable story, says Mr Young.

The outlook for European investment is reasonably healthy, he believes. Despite the slowdown of the last quarter, there is scope for earnings growth this year.

Although there is theoretically plenty of scope for cost-cutting in European companies, Mr Young warns against expecting too much. The strength of social consensus will ensure that employees continue to enjoy a sizeable share of corporate wealth.

"It is almost impossible to exaggerate the degree of cultural difference between the US and parts of Europe. A lot of potential value will never go to shareholders," says Mr Young. This is more true of bigger, older industries, such as metal-bashing, than newer industries such as computers, he adds.

Scandinavia remains the favourite investment market, but the fund will continue to pick and choose in several markets.

Mr Young sees no difficulty with the fund growing in size. "We still have more good ideas than cash to invest."

European Growth Trust Morgan Grenfell Asset Management, 20 Finsbury Circus, London EC2M IUT. Telephone: 0171-588 7171

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