Europe: A stock picker’s dream
The headwinds in Europe are clear, but some are beginning to reconsider their underweight position in the market.
Investors’ fearful flight from European stocks has created a massive opportunity for contrarian managers, who can pick up global large-cap companies at bargain prices, according to Ajay Gambhir
, manager of the RWC European Alpha fund
Gambhir says that the huge underweight position of fund managers in Europe is due a correction, and with the reduction of the chance of a eurozone break-up, earnings and valuations will soon start to determine share prices gain.
“Whilst we cannot say that the European tail-risks have disappeared, we do believe they are diminishing,” he explained. “Even if equity markets correct, we are entering a period where markets will be less dysfunctional; earnings and valuations will begin to drive share prices.”
“We are particularly excited about the opportunities for stock picking and alpha generation as this process unfolds.”
July’s Bank of America Merrill Lynch fund manager survey showed investors were 35 per cent underweight Europe, while European equity markets are 20-50 per cent cheaper than their US equivalents and 10-30 per cent cheaper than their Asia counterparts.
Gambhir argues that this means a re-allocation of assets to Europe is likely to ensue as investors’ concerns re-focus on the US fiscal deficit and the slowing growth in China.
Some will argue that the threat of a eurozone break-up remains, after Italian Prime Minister Mario Monti was quoted last week warning that the economic pressures being put on countries like Italy could leave to a future Italian government leaving the currency union.
However, European markets have performed well in recent days, supported by strong words from policymakers that they would do whatever it took to defend the currency.
Gambhir also finds good opportunities for high-yielding stocks on the continent, and says that in the current sideways market dividends contribute more to total returns.
He is investing in both cyclicals and defensives for income, citing Daimler – which has a yield of 6 per cent – and Sanofi – 4.4 per cent – as two top performers.
His comments agree with those of Premier’s David Hambidge, who told FE Trustnet last week that he was looking to undervalued European stocks for income
RWC European Alpha sits in the IMA Absolute Return sector, and uses long and short strategies to protect capital while aiming to make modest gains.
The fund is being re-opened to new investors, having soft-closed last year – although the minimum investment is $25,000. Data from FE Analytics shows it has slightly outperformed its sector average since launch in July 2010.
Performance of fund versus sector and MSCI index since launch
Source: FE Analytics
Data from FE Analytics shows that the max drawdown of RWC European Alpha over the past two years is 13.2 per cent, whereas that of the MSCI AC Europe index is 24.05 per cent, suggesting the fund protects investors in a falling market.
The fund’s annualised volatility of 9.43 per cent also compares favourably with that of the index, which scores 17.51 per cent.
Absolute return funds have had a poor press of late, with many criticizing the track record of the majority of funds in the sector.
Dan Mannix, Head of Business Development at RWC, says the controversy is distracting investors from the potential of long/short strategies.
“Not only are certain parts of the European equity universe starting to look compelling from a valuation perspective but the dislocation within the asset class allows a long short investor to take advantage of it from both sides,” he said.
“If investors simply consider a strategy like Ajay’s as a conservative way to access the opportunities within European equities they are unlikely to be disappointed over the long term.”
RWC European Alpha has a short track record, however, and our data shows that its slight outperformance of the sector has come at the cost of extra risk.
The annualised volatility of the IMA Absolute Return sector over the fund’s two years is just 2.55 per cent, more than three times lower than that of the fund.