Sym (pictured), who took over the portfolio from previous manager Leon Howard-Spink in June, says the market hasn’t priced in how depressed earnings have been in Europe.Though the region’s had a strong run, he says there’s plenty of room for upside in a number of different sectors and companies, pointing out that depressed earnings are making certain companies look more expensive than they deserve to be.
For this reason, he’s been shifting the fund away from quality defensive stocks like Nestle and toward “all-out growth stocks” like Austria’s Wienerberger, the world’s largest brick manufacturer.
“Europe has had a great run and everyone has been more positive.
You can’t stand here and say Europe is super cheap anymore like you could two years ago,” said Sym, who also runs the Schroder European Alpha Income fund.
Performance of indices over 2yrs
Source: FE Analytics
“I’m trying to construct a fund that can most benefit from a recovery, and I’m doing that by buying companies where earnings are most depressed. What’s not in the price is that companies can recover lost output of the last six years.”
The manager goes so as far as to say investors need to change the way they look at valuations in Europe, insisting that P/E (price to earnings) ratios can often be misleading.
“[Outside the growth defensives] the rest of the market has very depressed earnings. You’re going to come to the wrong answer if you just look at profitability and that’s what happens if you look at P/E for the next 12 months,” he said.
He goes on to say that while the market has been rising in Europe, valuations aren’t nearly as high as those in the “booming” US and UK.
Sym says 90 to 95 per cent of the portfolio he inherited from Howard-Spink was scrapped based on his high conviction bet on growth and recovery in Europe.
“Our starting point was a blank sheet of paper,” he said.
Sym says he then listed what he considers the 40 best opportunities for the next 18 months, though a few stocks which were already in the portfolio fitted his criteria.
Backing his conviction for economic expansion in Europe, Sym is overweight three types of stocks – financials, industrial cyclicals and growth stocks.
If markets are normalising, he argues, banks and insurance companies look extremely cheap and because investors refuse to believe Europe is on its way out of the woods – that’s not priced in.
Industrial cyclicals fit into his scenario because they tend to have a very depressed earnings base and the markets doubt their sustainability.
Finally, he says growth stocks are trading on premiums which are near historic lows and he expects to see total returns of 20 per cent or more from these types of stocks in 2014.
“The portfolio we inherited was the opposite of our view. It was full of quality defensives and these may well outperform over the long term, but I’m trying to look at what will outperform over three years. That’s why I’m looking at these recovery cyclicals,” he explained.
Sym says a P/E can look high, but what the markets underestimate is the earnings potential of the high-growth companies he favours.
“A P/E in the high teens is a high P/E, but for something growing at 20 per cent, that’s not very expensive,” he said.
“That’s my argument as to why growth stocks look quite interesting. These aren’t Nestle. These are out and out growth stocks.”
The manager highlights jeweller Pandora, famous for their signature charm bracelets, as a company with “reliable growth for the foreseeable future”.
Sym says he is targeting companies like colostomy bag manufacturer Coloplast, which he recently sold after it shot up from 22 times earnings to 35 times over the course of six months.
While a number of changes have beset the Alpha Plus portfolio since Sym took over, the manager point out that certain aspects have remained the same.
He says it’s still a highly concentrated portfolio, though at 40 stocks the fund holds slightly more than the 33 which were in the fund when he took over.
The fund is also still unconstrained, with the flexibility to invest across a range of countries and sectors.
In the brief period since Sym took over the fund, it has outperformed both the IMA Europe ex UK sector and FTSE World Europe ex UK index, though it still slightly down over the period.
Performance of fund vs sector and index since June
Source: FE Analytics
Sym worked at Cazenove Capital since 2007 and joined Schroders when the former was bought out last year.
Over his career as a fund manager, Sym has strongly outperformed his peers, picking up 59.07 per cent while the peer group composite made 35.29 per cent.
Performance of manager vs peers since Oct 2012
Source: FE Analytics
Most of this outperformance has been as a result of Schroder European Alpha Income’s strong run. The £339m is a top-decile performer since Sym took it over in October 2012.
Schroder European Alpha Plus has ongoing charges of 0.92 per cent.
