Being a fund manager investing in European companies hasn’t been a path strewn with roses, according to Miton Group’s Carlos Moreno and Thomas Brown.
While investors have been rewarded for placing their faith in the newly-launched LF Miton European Opportunities – seeing gains of 65.54 per cent over the three years since launch – Moreno and Brown said being fund managers investing in Europe is a ‘non-stop battle’.
“Since we started managing the fund we have seen sentiment swings, fears about [US president] Donald Trump, about Brexit, about the de-globalisation of the world, trade wars and all sort of issues with stocks in our investment universe etc. It is one non-stop battle,” said Brown.
“There is always stuff going on but the way it works with running a fund like LF Miton European Opportunities is, we need to pick a few more winners than losers and hopefully that will deliver a good performance, not just a good performance number but a good risk number as well.”
The key to outperforming while delivering risk-adjusted returns, the pair said, has been entirely driven by stock selection instead of market timing and a sole focus on “highly profitable companies with good balance sheets”.
That focus on companies that can exploit the high return on capital, invest in themselves and deliver superior long-term earnings growth has helped the 51-stock portfolio being the best performing fund of those launched during the second half of 2015, FE Trustnet found out.
Performance of index over 3yrs
Source: FE Analytics
But as the fund comes to its three-year anniversary, Moreno and Brown said the market environment is now looking more like it did three years ago, where sentiment towards Europe was adverse for those looking for European winning stocks.
“Over the life of the fund, the market environment has changed quite a lot, when we launched the fund Europe was very disliked, a number of people who we went to see before we launched the strategy would tell us that Europe was ‘uninvestable’,” said Brown.
“And then in January 2016 the market had a general fear about China blowing up and exporting deflation all over the world.
“From that negative start, sentiment towards Europe became more and more positive and it was extremely positive towards the end of 2017,” he continued. “We saw things couldn’t get much better in Europe, we had a long period where the economic data was outperforming expectations.
“At the beginning of 2018 we entered the market with sentiment very high, the index had done very well over two years, but the index has fallen, and the economic outcome has been worse in expectations.”
However, according to the LF Miton European Opportunities managers, not only is investing in Europe now more interesting that it has ever been, but they believe their rigorous stockpicking approach will continue to generate alpha regardless of the economic and market conditions.
“When a downturn comes it will wash through the portfolio and, relatively speaking, we will do okay,” said co-manager Moreno.
Brown added: “Sentiment towards Europe versus a year ago is so much worse than it was and, if you think about the pendulum of sentiment, we can definitely say it is a more interesting time to be invested now than it was a year ago when everyone was uniformly bullish on Europe.
“Sure, the outlook looks worse, but the sentiment has gone much worse and we think that is potentially an opportunity as the pessimism is already reflected in the stocks we hold.”
The pair also believe the increasing amount of money going into passive strategies has the potential to make the generation of alpha easier for managers like them.
Some examples of those under-appreciated European mid-caps with strong long-term potential Miton’s Moreno and Brown hold are luxury car manufacturer Ferrari and digital marketplaces operator Scout24, which, they said, are diamonds in the rough investors can’t get elsewhere either through a passive strategy or a mainstream fund.
As Brown and Moreno have noted previously, larger funds are forced up the market capitalisation scale while smaller funds can be more nimble and seek out more interesting growth opportunities.
“We pick the stocks investors can’t get elsewhere either through a passive fund or through a mainstream one,” said Brown.
“Small companies tend to be risky: the best risk-reward tends to happen for medium-sized companies, as they can grow but they are very proven,”
“Also, when people look at having exposure to Europe they like something different. For that reason, a lot of our holdings are different from the holdings in many European funds,” Moreno noted.
Another example of company the team has favoured is Sika Group, a specialty chemical company for building and motor vehicle supplies headquartered in Switzerland.
“Sika is one of the two biggest players and the industry is consolidated but still very fragmented, so it is a very interesting medium-term story: as it consolidates margins are moving higher,” said Moreno.
The company, they said, has played out over the last decade and will continue to play out over the next decade.
Performance of fund vs sector since launch
Source: FE Analytics
Since launch, the £377.8m LF Miton European Opportunities has delivered a 65.54 per cent total return compared with a 33.46 per cent gain for the average fund in the IA Europe excluding UK sector.
The fund has an ongoing charges figure (OCF) of 0.94 per cent.