Ben Yearsley: Don't let Greece fuss put you off Europe bargains
Saturday 10 March 2012
Throughout 2011 we were bombarded with headlines like Greek Tragedy and Acropolis Now as the Greek debt crisis took centre stage. It is little wonder that investors took fright and many European funds saw net outflows. It has become an unloved, neglected sector. Yet I believe it is worth looking beyond the headlines. Although Greece is symbolic of the wider problem of a lack of economic and political cohesion in Europe, the economy itself only represents around 2 per cent of eurozone GDP. Given that a "disorderly" sovereign default has been averted (for now!), perhaps we can concentrate again on the prospects for European equities whose values in many cases have fallen to attractive levels amid the prevailing gloom.
Europe has 500 million inhabitants and represents around 15 per cent of world stock market capitalisation. From an investment standpoint it is too large to ignore, but that is what many investors have done for nearly a decade, a far cry from the late 1990s when European funds were highly fashionable. The Greek crisis, and to a lesser extent what has been going on in the other peripheral European countries, has distracted and worried potential investors. As such the market is good value, trading on a price-to-earnings multiple of under 11, well below its historical average. In addition, many companies are quietly thriving. It is therefore worth looking again at Europe, especially since there are some high-calibre fund managers who have specialised in the area for a long time. One is Richard Pease, manager of the Henderson European Special Situations fund, who has 25 years' experience in the industry.
Let me firstly point out that the Special Situations moniker of this fund shouldn't put you off. The name suggests it might be a particularly high-risk fund, but I don't believe this is the case. Delve deeper into Mr Pease's investment style and process and you gain a fuller understanding of the fund and what makes it unusual.
Mr Pease favours "family businesses", essentially where founders or family still have significant shareholdings and are often involved in running the business. Frequently these are firms that would otherwise be private companies but have retained a stock-market listing almost by accident, for example if a large stakeholder wanted to exit in the past. In Mr Pease's words, they are companies that "don't really need him". They are well funded, robust and not vying for investors' attention. Once he has identified such a company he usually sticks with it, believing that buying a good business negates the effect of bad timing over the long term. Don't expect much chopping and changing in this fund.
Another trait Mr Pease searches for is recurring revenue. He cites the Fuchs Petrolub run by Dr Fuchs, a German lubricant company with a "sticky" revenue stream. Fuchs is the largest independent supplier of lubricants in the world and the company's products are used in lots of heavy machinery as well as standard vehicles. If Fuchs oil isn't used with certain machinery it can invalidate the manufacturer's guarantee, so plenty of cash is generated each year from the existing order book. Another example is Compugroup, which provides doctor and dentist software; 98 per cent of its revenue is recurring.
Many of these cash-rich, cash-generative companies are also producing good dividends and Mr Pease expects yields from lifts manufacturer, KONE, and Norwegian oil platform lease company, Fred Olsen, of 6 per cent and 8.5 per cent.
It is hard to ignore the political mayhem in Europe. Yet there are lots of world-class, niche companies there, and it is wrong to shun them just because of where they are based. As Mr Pease puts it, "Where you are born is less important than what you do afterwards." I believe investing with a manager like Mr Pease is an excellent way of taking advantage of the opportunities. His mantra of buying good-quality businesses and ignoring the short-term "noise" of the market should yield excellent long-term results for investors. I agree with his view that many investors have forgotten the golden rule of patience. There is nothing wrong with buying good-quality companies and waiting.
Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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