Mutual funds: Articles
NEW STAR PAN-EUROPEAN EQUITY FUND 01/09/2006
Author: Lianna Brinded
The New Star Pan-European Equity Fund was launched in December 2005 as a pure stockpicking fund with a focus on absolute rather than relative returns. Here Daniel White, explains his how he has positioned the fund since inception.
Has stock selection paid off?
The fund outperformed European markets since launch to 31 May 2006, returning 9.8% against 5.7% for the FTSE World Europe Total Return Index (Source: Standard & Poor's at 31.05.06). This is partly the result of the fund's higher mid and small-cap exposure compared to the comparative index.
Small and medium-sized companies did well in the early part of the year but they suffered during the market correction in May and June. The fund is, however, made up of defensive stocks and thus enjoyed some resilience during the recent market sell-off. As might be expected in a fund of this type, market selection only had a slightly positive impact on performance over the first five months of 2006, with most of the gains achieved through stock selection. These came from the Europe excluding the UK portion of the fund, with the UK portion marginally negative.
Do you believe the recent market correction may encourage investors to sell out of mid-caps and switch into larger companies?
Medium-sized companies have done best during the bull run since March 2003. The recent market correction, however, should be viewed as a healthy correction rather than a trigger to sell. There are attractive valuations across Europe and the underlying economic circumstances remain unchanged.
Positive sentiment is returning in Continental Europe and an upbeat stance appears sensible. In such circumstances, the correction can be viewed as a buying opportunity rather than a cause for alarm. At the end of May, the fund did have a majority of its assets in larger companies but retained a significant portion at the lower end of the scale, with about 25% in mid-cap stocks and 21% in small cap stocks. Mid-caps have led the way over the last two years and the fund's holdings since its launch have been no exception.
While the fund's large-cap exposure has been increasing, this shift has been made out of fund inflows and moves to reduce diversification slightly. The fund's mid-cap stocks remain well positioned for further growth and the market correction is actually throwing up a number of ideas for additional medium-sized company holdings.
What are the prospects for Pan-European markets over the coming months?
The team is frequently asked this question and the response frequently disappoints. I genuinely believe that investing based on market outlooks is an added risk that investors do not need. Having said that, the economic environment in Europe excluding the UK is healthy. Valuations are cheap relative to historic prices while consumer and industrial sentiment is positive, particularly in France and Germany, creating compelling reasons to invest. In mid May, the market was obviously shaken by valuation concerns and some concerns persist. High levels of debt in the US are a long-term concern and they have the potential to affect other global markets.
The issue has, however, been hanging over global markets for the best part of 20 years, so predicting the point when sentiment shifts significantly is hazardous. Other concerns include resurgent inflation and further interest rate rises in the eurozone but generally the economic outlook is positive.
In the UK, Stephen is equally optimistic, seeing recent market weakness as a healthy correction in a more long-term bull market. Most UK equities are trading on reasonable valuations but the correction was a timely reminder of the need to focus on valuations. Shares are getting rarer in terms of supply, the housing market is holding up and corporate profitability is generally in line with expectations. Indeed, Stephen believes it would not be unrealistic to expect a fourth year in a row of double digit returns from the UK equity market.
In such circumstances, there are good grounds to be relatively positive about economic prospects and the fund's holdings look well positioned to deliver if the current favourable conditions are sustained into 2007. At the same time, its focus on cash generative, cheap companies should offer resilience in the event of any economic growth slowdown.
FAVOURED HOLDINGS
Beneteau
Beneteau is a mid-cap French company that makes sailing yachts and was an addition to the fund in March. It has a high free cashflow yield, sound finances and good quality management. Already a leading player in the sailing market, Beneteau also builds motor launches, potentially a source of further growth.
Saft
Saft makes batteries for niche markets, such as the aviation industry, industrial infrastructure and processes, space and defence. Saft batteries are used by the US military and by the aeronautical industry to power lights that indicate the way to emergency exits. Saft issued a profit warning in November and the fund used this opportunity to buy into the stock at lower levels.
Carrefour
This is one of the fund's largest holdings. Carrefour is one of the world's largest retailers and is based in France. It has been held by the fund since launch and continues to exhibit many of the attractive qualities typical of portfolio holdings. Carrefour has recently sold businesses in Japan and Korea to focus on growth in China and remains on an attractive valuation.
George Wimpey
In the UK, Stephen currently likes housebuilders such as George Wimpey, which have been trading on low p/e ratios. Stephen thinks the sector is in a secular growth phase, with demographic changes producing a housing shortage.
Guala Closures
This Italian company is among the world leaders in the production of safety closures for drinks and food manufacturers. Such closures are increasingly in demand as companies export to emerging markets where there is an increased risk of fraud. Guala, with its niche market and cheap valuation, is a typical Pan-European Equity Fund holding.
