There is a perception among some UK investors that Europe, with its high taxes, strong unions and excessive amounts of red tape, may not be the best destination for their money – especially compared with a pro-business region such as the US, for example.
Rightly or wrongly, a key message from the Leave campaign in the run-up to Brexit last year was that the UK would be better off on its own, unshackled from the bureaucracy imposed by the EU that the rest of the continent seems to happily accept. In a Trustnet Direct article published around this time, manager of the Jupiter Asian Income fund Jason Pidcock even went as far as to refer to the EU as the “European Soviet Union”.
While it is never wise to rely on generalisations about entire continents, countries or groups of people, FE Alpha Manager Michael Clements of SYZ Asset Management, which runs the Oyster Continental European Selection fund, has carried out his own research highlighting which countries are most inefficient at certain points in the business cycle – and more importantly, he has found a way to profit from this.
“It is fair to say the Italians are pretty slow at paying you,” he explained. “Data shows it will take them an average of 53 days to pay money they owe you. The Germans are the best in the world at this, paying you in 14 days, which is faster than they should – very efficient, very German. But the Italians are at the other end of the scale – they will pay you at their leisure.”
This led him to invest in Banca Sistema, Italy’s leading “receivables factoring” business, which is a specialist area of debt collection.
“Say you’re a pharmaceuticals company and you sell €100 of drugs to the Milan hospital system,” Clements said.
“If you’re quite nervous about having all this money tied up with your customers and they’re not paying you quickly, you sell that invoice to another company such as Banca Sistema. Now Banca Sistema will buy that €100 of invoices for €90 and then it will go and collect the full amount.”
While something as simple as collecting money owed to you may seem like an odd reason to part with 10 per cent of the cost of your product, Clements said that in Italy, this is an activity that requires expert knowledge.
“Actually the bureaucracy is incredible,” he continued. “You need to put everything in triplicate and you need to submit it to the right person in the right format. Not only does Banca Sistema know that, it knows you need to talk to this person who works in this department who works on this day, he’s at lunch at this hour and you need to talk to him at this time with these forms and then you can actually collect the money. So it has better knowledge about all this than anyone else.”
Clements added that because Banca Sistema is buying the invoices of money owed by state-owned institutions, it is a very low-risk investment as the company knows it will get paid eventually, it is just a question of how long this is going to take. He said the one major threat he can see to this company would be if the Italians suddenly became more efficient.
“That’s not very likely, though,” he added. “We’ve done a lot of work on this and actually the Italians are getting worse rather than better.”
“Of course if you’re that pharmaceutical company, you actually want to get €100 so what you do is you sell €100 of drugs for €110, then you sell it to Banca Sistema for €100 so you’re happy. And who pays for it? The Italian state, so they are actually paying for their own inefficiency.”
Clements’ strategy involves looking at stocks and sectors facing problems that will depress share prices in the short term, then identifying whether this means they offer value to long-term investors.
When he came across Banca Sistema, he was puzzled as to why it was so cheap considering it had such a solid business model – and he said the answer was simply that it had the word “bank” in its name.
“Honestly, this is the truth,” he explained. “We did a lot of work trying to understand this and when Unicredit was tumbling, investors sold anything that sounded like a bank. It’s not a bank, it’s not the same thing at all, yet its share price came down to such a low level. Investors blanket-sold anything to do with Italian financials.”
Data from FE Analytics shows that Oyster Continental European Selection has made 63.22 per cent since launch in December 2013 compared with gains of 53.99 per cent from the IA Europe ex UK sector and 50.87 per cent from the MSCI Europe index.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund is £111.4m in size and has a total expense ratio of 1.27 per cent.