Walewski (pictured), manager of the Alken Absolute Return Europe and Alken European Opportunities funds, says the only reason earnings upgrades haven’t yet come through in the region is because so many companies are globally oriented, which means their earnings figures are tied to global PMI rather than just that of Europe.However, he says the recovery is happening in Europe and earnings upgrades are on the way. As a result, he thinks now is the time to move away from pure European domestic stocks and into more global businesses.
Walewski’s Alken funds have won a huge number of admirers in recent years following several strong years of performance.
Both FCA-offshore recognised funds are closed to new money, with the Absolute Return portfolio already €2.7bn in size despite only being launched in 2011. European Opportunities was launched in 2006, and is €5.3bn in size.
While you can no longer get access to the funds, here are five companies Walewski is using to play the recovery in Europe, which may be of interest to investors in international companies.
The bank – Banco Popular
The banking sector has been one of the most volatile areas to invest in Europe since the sovereign debt crisis began. While Alken aren’t ultra bullish on the sector, Walewski says his funds’ weight to banks is “near benchmark” and they are “cherry-picking” individual holdings within the sector.
“There’s been a retreat in the sector over the last couple of weeks. We saw some worries last week, but people shouldn’t panic,” he said.
“It’s true the banking sector is volatile and will probably remain volatile for a while.”
One stock he likes is Spain’s Banco Popular, the fourth largest banking group in the country.
Walewski first bought the stock in November 2012 after the bank underwent aggressive recapitalisation. The manager says earnings were subsequently boosted by declining provisions for bad loans.
“Credit demand from small and medium enterprises is now picking up and Banco Popular is in the best position to benefit from this,” he said.
Only one IMA fund – SJP Continental European – holds Banco Popular in its top-10.
The consumer play – Peugeot
The improving outlook for the consumer is another theme for Walewski, who thinks retail is unjustifiably the most underloved sector in Europe.
“The sector is viewed as domestic and is under threat from the internet, but actually we see interesting stocks in retail,” he said.
A stock he likes is French automaker Peugeot, which he bought at the end of last year.
“A positive market share dynamic in the highly profitable market of China will accelerate thanks to a new partnership with (Chinese motor company) Dongfeng,” he said.
The manager also thinks the arrival of a new chief executive, Carlos Tavares, who was previously a senior executive at Renault, will reinforce ongoing cost cutting and cash generation for the business.
“We believe both top line and margins will continue to beat consensus expectations over the next quarters,” he said.
No IMA funds hold Peugeot in their top-10.
The restructuring story – Veolia
One of his more contrarian bets, French transnational water supply and waste management company Veolia Environne, will benefit from economic recovery in Europe due to its massive restructuring.
The manager says there is significant upside to be had from the current cost cutting programme and financial restructuring the company is implementing.
He thinks there is strong potential for energy and industrial services in Europe as well as further consolidation of the industry. Alken first bought Veolia in August 2013.
Again, the stock isn’t currently being backed in a big way by any IMA funds.
The contrarian bet – RWE
An even bigger contrarian bet, according to the manager, is energy and disposal firm RWE.
“Utilities have been very overlooked, massively underowned and massively underinvested,” the manager said.
However, he thinks there is value in many utilities across Europe, particularly in Germany but also in select cases in other parts of the region.
“The market expectations for this company are still extremely bearish. Our views on these companies were similarly pessimistic until the third quarter of 2013.”
“Last autumn, we forecasted an inflection point where the Germany government, in order to avoid black outs and increase security of supply, was going to have to compensate RWE for further power price declines in order to avoid capacity closure. This has already started with the recent Germany energy reform,” he said.
“We expect renewable growth to be slowed and capacity payment mechanism to be put in place within the next 18 months. We also expect RWE to generate further cost reductions that will underpin estimates.”
RWE is Walewski’s largest holding in the European Opps fund, making up more than 7 per cent of assets. It is a popular bond holding, but no equity funds hold the company in their top-10.
The technology punt – Micron
Though Walewski says opportunities are more difficult to find in the technology sector, he likes US-based Micron Technology, which produces many forms of semiconductor devices.
The manager says after decades of value destruction, the industry has consolidated and manufactures have the necessary scale to compete. He adds that barriers to entry are extremely high, which means those companies already established will face less competition from newcomers.
“Demand is increasingly driven by mobile and cloud applications, which drives the mix away from lower margin PC DRAM,” he said.
“Current valuation at a PE of nine times does not acknowledge in our view the structural improvement in the industry.”
Barlcays US Alpha and FF&P US All Cap Value Equity both hold Micron in their top-10.
Walewski’s Luxembourg-domiciled Alken Absolute Return Europe fund and Alken European Opportunities fund have been standout performers relative to their peers.
The five crown-rated Alken Absolute Return Europe fund is up 23.44 per cent since launch in January 2011. The average fund in the FCA Offshore Recognised Absolute Return sector is down 0.08 per cent over this period.
Performance of fund vs sector since launch
Source: FE Analytics
The fund has managed positive returns every calendar year since launch. Year-to-date the portfolio is up 2.78 per cent while the average fund in the sector has fallen 2 per cent.
The more aggressive Alken European Opportunities fund has also fared well relative to its peers and index, beating both measures over one, three and five year periods.
Since launch in January 2006, the fund is up 132.52 per cent, while the FCA Offshore Recognised Equity Europe sector is up 54.6 per cent.
The fund’s benchmark, the Europe Stoxx 600 index, has gained a mere 49.82 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
Alken’s remaining offering – the Small Cap Europe fund – is also closed to new investment.
