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Mitchell: I haven’t been this bullish for 25 years

03 April 2013

The European manager thinks Germany is in a particularly strong position, labelling it “arguably the strongest, most fiscally strong country in the developed world.”

New FE Alpha Manager Stuart Mitchell says he is as bullish now as he has ever been across his entire 25 year career, rubbishing claims that the eurozone is the biggest headwind facing global markets.

Mitchell
is fully invested across his SJP Greater European Progressive and Continental European portfolios, and has zero short exposure in his SWMC European hedge fund.

This, he says, reflects his belief that the European market is “remarkably” cheap, and far less risky than the consensus suggests.

“I haven’t been this happy with the portfolios since I started 25 years ago,” he said.

“There seems to be a view in the UK that the euro is on the brink of collapse – if you suggested this to politicians and other leading figures in Europe, they just laugh.”

“I don’t think people quite understand the strength of will that politicians have in making this work. There is no plan B. The euro is here to stay – that’s it.”

Mitchell thinks there are reasons to be positive in both the “problem” peripheral countries such as Greece and Portugal, as well as stronger nations like Germany.

“As a whole, the eurozone’s debt to GDP is lower than the UK and the US. The primary debt levels are even better, and improving,” he said.

“Even the peripherals are improving. Budget deficits are under control, and in some cases coming down. If you look at Greece, the level is down to around 6 per cent.”

“I don’t really see Italy as a big problem, in that the country is one of the richest in the entire eurozone. Yes, a lot of this money is tied up in individuals’ wealth, but I don’t think the debt elsewhere is large enough to derail a recovery.”

With regard to Germany, he said: “The balance of trade [trade surplus] is higher than it is in China. Germany is arguably the most competitive, fiscally strong country in the developed world.”

Against this backdrop, Mitchell thinks European markets have the scope to perform very strongly, since valuations are so cheap on a relative and absolute basis.

“The companies in Europe are pretty much indistinguishable to those in the US, but are just a lot, lot less expensive,” the manager said.

“European companies are on a 40 per cent discount compared to the US, which I just can’t understand.”

“At the very top level, quality companies like Nestle and Unilever are trading about in line with the US. However, when you go beyond this level, you can find some real bargains.”

“A company like [French hotel chain] Accor is on a 40 per cent discount to Marriot. BNP Paribas is around the half the valuation of Wells Fargo, which we think is very extreme.”

“We saw there was an extreme opportunity in 2009, and since then the market has about doubled. We’re slightly surprised it hasn’t gone up further than that, but perhaps that’s what’s coming next.”

Performance of indices since March 2009

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Source: FE Analytics

“At the very least the market should be in line with its five year average, which means at least another 30 or 40 per cent,” he added.

Mitchell is 100 per cent long equities across all three of his European funds – a stark contrast from 2002, when he had up to 80 per cent in cash at one point.

“I haven’t always been this bullish – in 2002 I was net short and in my long portfolio I had 80 per cent in cash,” he said.

“The challenge was that valuations were very high and the economy was slowing down. That isn’t a problem now.”

The manager buys in to the “great rotation” argument, but admits that he doesn’t know what will be the catalyst for an all-out shift into risk assets.

“To be honest, I’m very surprised it hasn’t happened yet,” he said. “The bubble in bonds hasn’t yet popped.”

“I’m not sure what the catalyst will be – perhaps a rate change in the US – but if you consider that equities haven’t been this cheap compared to bonds in the last 200 years, it’s something I’d expect to see happen.”

The manager says he is predominantly growth-focused, targeting “best in breed” companies that have a certain edge over their competitors.

However, Mitchell says he also targets value stocks, which tend to make up between 20 and 30 per cent of the portfolio.

He currently likes the banking and airlines sector, including BNP Paribas, Lloyds, Santander, British Airways and Air France across his funds.

Though he believes the risks surrounding peripherals have been overblown, Mitchell has most of his portfolios invested in northern European countries, such as Germany, Luxembourg and Scandinavia.

He has run the five-crown rated SJP Greater European Progressive fund since September 2009. It has returned per cent over this period, significantly outperforming its IMA Europe including UK sector average and FTSE Europe index benchmark, with less volatility in both cases.

Performance of fund versus sector and index since Sept 2009

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Source: FE Analytics

This puts it comfortably in the top quartile of the sector.

The SJP Continental European fund has also beaten its sector and benchmark since Mitchell started running it, this time in October 2007.

Mitchell’s SMWC European hedge fund, which he only took charge of in 2011, is institutionally-focused, and has a very high minimum investment. However, SJP Continental European and SJP Greater European Progressive are retail friendly, with a minimum investment of £1,500.

They both have an ongoing charges fee (OCF) of around 2 per cent.

Mitchell’s team has been together since he started his career over 25 years ago. During that time he has run portfolios at DWS and JO Hambro Investment Management.

“We’ve had exactly the same process all the way through,” Mitchell explained. “We’re stockpickers, going to as many company meetings as possible.”

“Of course we look at the macro, but we’re all about companies. Our team of seven visits between two and three companies between us every week. Next week I’m off to Switzerland, the week after that Frankfurt, and then Russia.”

Performance of manager versus peer group composite over 10yrs

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Source: FE Analytics

Mitchell has beaten his peer group composite over a one, three, five and 10 year period.

He was made an FE Alpha Manager in the latest rebalancing for the first time, which rewards managers for risk-adjusted performance versus their peer groups, in both rising and falling markets.

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