Mark Dampier: Europe is a happy hunting ground for Henderson fund
Friday 18 January 2013
Wider economic concerns dominated news flow during 2012. The eurozone crisis, a slowing Chinese economy and the prospect of tax rises and spending cuts in the US were the subject of many column inches. Some investors were wrong-footed in believing the worst of every outcome. Last year proved better for stock markets than most imagined.
I am not so complacent as to believe the world's economic and financial problems are resolved. The euro hasn't failed but peripheral economies remain debt-laden and uncompetitive. Chinese economic growth remains strong by Western standards but the road towards rebalancing from exports to domestic-led growth remains long and fraught with difficulty. The problems in the US have merely been kicked down the road.
Nevertheless, the events of 2012 show that the most uncomfortable investment decisions are often the most fruitful. At the end of 2011, Europe was almost completely written off. Private investors were selling their European funds in droves, but it turned out to be a good year. The FTSE World Europe Ex-UK Index rose 18 per cent, while the average fund in the IMA Europe Ex-UK sector was up 19 per cent.
The European sector is home to many experienced and successful fund managers. John Bennett is one. He took over the Henderson European Selected Opportunities Fund from Roger Guy, another respected fund manager, in February 2010. It was a strong act to follow, but I don't think he has disappointed.
The fund predominantly invests in large companies. Many fund managers struggle in this area as large companies are so well-researched it is difficult to have an edge over competitors. To outperform, you need to be aware of the benchmark's composition but not driven by it, according to Mr Bennett. This means he will take meaningful diversions and not just hold 5 per cent of a stock because it represents 5 per cent of the benchmark. The performance of the fund is therefore likely to differ significantly from the benchmark, especially over shorter periods.
Mr Bennett is a believer in mean reversion (the theory that prices or returns move back towards their historical average over the long term). Therefore, bad companies will not be forever bad and good companies struggle from time to time. He believes the way to achieve outperformance is initially to make sector calls rather than focusing purely on stocks. Presently, he has an overweight position in the healthcare sector, which represents about 25 per cent of the portfolio.
Pharmaceutical stocks peaked around the same time as the technology bubble, and have effectively de-rated ever since. Investors' concerns have included the patent cliff (whereby patents on blockbuster drugs expire, opening them up to competition), President Obama's healthcare reforms in the US, and the Western austerity drive putting downward pressure on prices.
Mr Bennett doesn't believe that the headlines tell the full story. Investors are extrapolating and assuming these problems will run indefinitely. They are well-documented though and probably factored into share prices already. He is focusing on the wider changes taking place in the European healthcare industry. Regulatory burdens are easing with new vaccines and medicines being approved for sale. He is also focusing on companies where improved management quality is having an impact, with key holdings including Novartis, Roche and Sanofi.
In contrast, the telecommunications sector remains popular with investors, but Mr Bennett has no exposure. Profits have been affected by increasing use of free services on internet-enabled phones, which are replacing previously profitable services such as SMS. He believes this trend has further to go, and sees falling cash flow and unsustainable yields across the sector
Overall Mr Bennett believes that European stock-market valuations look attractive on a cyclically adjusted basis. With uncertainly still surrounding the global economy, further stock-market volatility cannot be ruled out. However, for investors with a five-year-plus time horizon, current valuations could present a good entry point.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
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