Mark Dampier: An unfashionable area can merit a close look
Saturday 25 September 2010
When I mention Europe to investors, most tend to roll their eyes with a mixture of astonishment and shock. Why would you invest in a continent where certain countries are effectively bankrupt? Where politicians understand market forces even less than our own, and where people go on strike when the age of retirement is increased to 62? However, an unfashionable area is sometimes worth looking at closely, and a hard investment decision can often be the right one.
There are so many good-quality fund managers in Europe that investors are spoiled for choice. So when Mark Pignatelli took over the Smith and Williamson European Growth Fund in 2008, he must have known he had a difficult task. His own career at Barings and latterly at Schroder managing European funds was very successful. However, he left Schroder in 2004 to manage and run his own hedge fund business, a painful experience partly because he found shorting stocks wasn't suited to his talents.
At Smith and Williamson, he returned to more familiar territory. European Growth is a straightforward long-only fund, with around 40-50 per cent in the top 60 largest names in Europe and the remaining 50-60 per cent invested in other stocks irrespective of size, sector or country. Pignatelli is keen on meeting management, and in the past six months has met 200 businesses, doing much of his own research and using the meetings to find out what is happening in various industries and supply chains. In this way, he hopes to detect the possibility of positive earnings surprises. He looks for high-quality companies able to self-finance their growth. Finally, they have to be at an attractive valuation with a sound management strategy and a growing footprint in their respective industries.
While Pignatelli is very much a stock picker, he is also interested in the overall economic situation. Interestingly, it is here that he believes the consensus of opinion has never been so far away from the actual facts. He believes it is the US where the world's economic problems lie, and that Europe is decoupling from the States.
He also points to the many good things going on in Europe that are being overlooked by the market. For example, the growing consumer confidence in Europe is at odds with falling sentiment in the US. In particular, the performance of Germany is strong, and the combination of Australian raw materials and German finished goods is effectively building much of China. Germany this year is likely to export more to China than the US, which shows how slowly the American economy has been moving.
Now you may disagree with Pignatelli's views, but I suspect we will find out over the next two or three months just how strong the European recovery is, and there may be positive surprises in store. Germany, for example, is importing at twice the rate from the euro zone than it is exporting – good news for many of its neighbours. Pignatelli also believes a large fall in unemployment is about to happen, even in Spain, and in Ireland unemployment has already been falling over the past two months. He feels that this should all come through in the data quite soon, and, far from avoiding some of the weaker European countries, people should actually be buying into them as they offer compelling value.
Europe is often mistakenly seen as the backwater of the investment world. Yet it has many world-class companies which have prospered despite the well-documented economic problems in the peripheral nations.
Few, if any, are talking about the region optimistically. The travails of Greece have hijacked the headlines, painting an overly pessimistic picture. This should be seen in context. Although a Greek default on its borrowings is likely in my view, Greece represents less than 3 per cent of the European economy. It is impossible to know how much a default is already priced in by the markets, but I believe Europe is an interesting investment theme at present, and the Smith and Williamson European Growth Fund is one to look out for.
Mark Dampier is head of research 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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