For this month’s three-year track record, Juliet Schooling Latter, research director, FundCalibre turns her attention to European equities.
‘A complicated and mixed outlook’ – that was the title of the latest market update I read on European equities. But in all honesty, every European outlook in the past decade could have had the same title and no one would have raised an eyebrow!
Sovereign debt, Brexit and a more cyclically driven economy have all played a role. Now it’s the relatively slow recovery Europe has made from the pandemic and the inflation debate which also looms large.
But the good news for investors is that there are great companies in Europe, many of which have a global footprint in terms of revenues. With dispersion in returns the order of the day, it is something of a stock-pickers paradise, and this month’s manager is a master stock-picker.
Zehrid Osmani has managed the FTF Martin Currie European Unconstrained fund since December 2018. And since then, performance of this high conviction portfolio has quite frankly been exceptional, returning almost double that of the average fund in the IA Europe ex-UK sector (94.7 per cent vs. 48.9 per cent*).
With more than two decades of experience, Zehrid is a veteran of European equities. He previously worked at BlackRock, where he spent 10 years as head of European equities research and ran several pan-European equity funds with a focus on unconstrained, high conviction, long-term portfolios.
The investment process on this fund is predicated on the basis that strong proprietary research can unearth long-term value-creating companies. Zehrid believes markets undervalue the compounding characteristics of quality growth companies. He aims to identify these companies and hold them for the long-term to enable them to generate excess returns with lower risk. He takes a 5-10 year investment time horizon and anticipates that turnover will be less than 20 per cent.
Initially, stocks are screened to find those which have generated return on invested capital (ROIC) in excess of their weighted average cost of capital in each of the past 10 years. Companies which do not have this 10-year history can be included – such as IPOs, companies which have undergone restructuring, or where the business outlook has considerably improved – if the team believe that they can generate higher ROIC going forward on a sustainable basis.
The team then looks for companies with low gearing and a market capitalisation greater than $3 billion and will analyse balance sheets to highlight those companies which have grown by acquisition rather than organically.
These screens throw up approximately 200 stocks, which are then whittled down by seeking those companies with strong balance sheets; experiencing secular growth; with strong corporate ethos/ESG; good capital allocation and, most importantly, a reasonable valuation.
The research scores a company (1-5) within four categories: industry dynamics; company risks; governance and sustainability; and portfolio risks. Company meetings are also integral to the process and the team will not invest until it has met the management.
Initial position sizes will be 2-5 per cent, depending upon conviction, while the maximum position size is 10 per cent. Despite being unconstrained, risk is closely monitored at a stock level via detailed due diligence into potential investments. The final portfolio is comprised of 20-40 stocks with the top three stocks (ASML, Moncler and Kering) currently accounting for more than 20 per cent of the portfolio alone**.
Zehrid has plenty of experience in managing European equities and has shown, conclusively, that his unconstrained, long-term approach can produce exceptional returns, regardless of whether a market is in favour or not. There is no reason why this fund does not have a very bright future.
*Source: FE fundinfo, total returns in sterling, 17 December 2018 to 30 August 2021
**Source: provider website, holdings as at 31 July 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
