The managers of five FE Crown-rated Artemis European Opportunities have dumped drugmaker Novartis and Spanish engineering group Tecnicas Reunidas while adding Italian stock doBank and healthcare company Fresenius.
Europe has become a more popular area for investors this year as domestic stocks have benefited from a more positive economic backdrop.
The fund’s managers, Laurent Millet and Mark Page, have begun to see this filter through in the form of clear and positive change for earnings forecasts among European stock analysts.
“Returns over the year to date suggest Europe is back in fashion,” said Page. “Those gains have been well supported by economic growth and by improving company fundamentals.
“More importantly to us, however, the region still offers compelling opportunities on a stock level.”
The manager said: “For the first time in years, rather than lowering their expectations for earnings-per-share growth for the current year, analysts in Europe have raised them as the year has progressed.
“From 2013 to 2016 they predicted corporate earnings in Europe would grow at the beginning of each year, only to subsequently edge back from those bullish forecasts.”
Earnings per share relative to trend
Source: Artemis
However there has been a sea change this year, with the analyst community upgrading their forecasts rather than lowering them.
He added: “This is a clear and a positive change. Meanwhile, profitability is still below trend in Europe, suggesting that it could snap back.
“On aggregate, the region’s companies seem set for their first full year of expansion in earnings for six years.”
Page said Europe seemed like an “area of relative stability” compared with the Brexit-focused UK and politically-deadlocked US.
As such the managers have brought two new holdings into the portfolio and have disposed of two more recently.
The first stock they added was German healthcare company Fresenius which holds a 30 per cent stake in listed kidney dialysis products company Fresenius Medical Care.
“We met the company’s management in May and it has continued to impress. The three pillars of growth continue to do well,” Page noted.
Its hospital management business has been boosted by the purchase of Spanish private hospital operator QuironSalud, while its infusion therapy and medical devices arms are also performing well
Another addition to the portfolio is Italian company doBank, which specialises in helping banks recover overdue loans.
“Size is everything in this business, with the largest players having the best databases and the most efficient processes,” the manager said. “doBank is four-and-a-half times larger than its nearest competitor, Cerved. As more non-performing loans come to market, doBank is ideally positioned to grow.
Performance of doBank YTD
Source: Google Finance
“Its valuation is compelling and the company should be able to grow sales by a high single-digit percentage and earnings by a double-digit percentage. The share price has jumped over 20 per cent since its listing.”
The managers also topped up their position in Refresco Gerber – a Netherlands-headquartered, soft drink-bottling company – after the share price reduced following its acquisition of US firm Cotts.
“Its shares had weakened because the market was disappointed in what we think is a good decision to buy Cotts in the US,” said Page. “This deal will give Refresco the national coverage and strategic footprint that it needs in a very attractive (fragmented) market.
“But investors thought that the deal would prevent further approaches from private equity firm PAI, which had unsuccessfully bid for Refresco in April.”
Page noted that PAI had returned to make a more recent approach of €1.6bn. which they believed undervalued the firm’s long-term growth prospects.
Elsewhere in the portfolio, the managers have sold the fund’s 3.4 per cent holding in drugmaker Novartis.
“The potential losses when drugs in a portfolio go ‘off patent’ have been much discussed but hopes that new launches will offset this are, in our view, too optimistic,” said Page.
“The result is that the stock trades on a price-to-earnings multiple in the mid-teens while offering only mid-single digit growth in earnings.”
The pair also disposed of Spanish engineering, procurement and construction company Tecnicas Reunidas, after it structurally changed “for the worst”.
“There is a drought of new orders and Tecnicas’ customers – the big oil companies, especially Saudi Aramco – are asking for longer payment terms,” the manager said.
“The end result is that there is pressure on margins and an increase in capital intensity. The dividend payment is no longer covered by the cashflow generated by the company and there is a risk of cancellation.”
The £373.7m Artemis European Opportunities was launched in 2011 and has been managed by the pair ever since.
Page & Millet’s investment approach focuses on buying European companies from across the continent and from different industries but with common attributes including solid balance sheets, strong profitability, predictable earnings and the ability to profitably reinvest cashflows.
The pair take a longer-term view of markets and have an average holding period in the fund of more than three years.
Since launch the fund has returned 136.16 per cent, compared with a rise of 106.05 per cent for the average IA Europe Excluding UK fund and a 102.63 per cent gain for the FTSE World Europe ex UK benchmark.
Performance of the fund vs sector & benchmark since launch
Source: FE Analytics
“This is a pragmatically run fund that essentially aims to generate consistent, though not aggressive, outperformance of the market and do so by not being overly wedded to any one particular investment style,” analysts at Square Mile Research noted.
“This fund could be viewed as more of an all-weather strategy, aiming to ignore market fads and focus on churning out reliable returns each year.”
The fund has an ongoing charges figure (OCF) of 0.85 per cent.