Running money during the pandemic was a major test of investors’ commitment to their process but chasing returns in the recovery is the wrong strategy, according to FE fundinfo Alpha Manager Stefan Gries.
The manager of several BlackRock portfolios, including the BlackRock Greater Europe trust, said although they might give strong returns in the short term, these rebound stocks would not last when the recovery was over.
His portfolio has a strong focus on growth, an investment thesis which has been tested over the recent months as investors have sought out value allocations to capitalise on the recovery trade.
This investment story was especially strong in Europe where sectors such as energy, financials, materials play a big part in the market.
Gries said that every year the market produces moments which “scare” investors, challenging their investment manta. This was especially strong during Covid-19 however, as the pandemic caused with highly volatile markets and a “powerful macro narrative” coming out of it, creating an uneasy environment for investors.
Although he is primarily a stock picker, Gries said the top-down macroeconomic view was still something he had to content with. But listening too much to that narrative and leaning into it only damages the long-term investment picture, he said.
For example, oil stocks will not be one of Europe’s “most exceptional” companies in a few years according to Gries, because they are being pushed by government legislation and shareholder pressure to transition into renewable energy.
“Our sticking point has always been that I can’t sit in front of my board and say with conviction that I’ve just bought this bank or oil company and I’m really confident I can own it for the next five years,” Gries said.
What Gries is seeing now though is “quite a sad affair” whereby a lot of capital is being misallocated because of the strong macro story.
In the case of the BlackRock Greater Europe Trust it has still been able to deliver best or second best returns in the IT Europe sector during not just the current value rally, but every time frame up to and including 10 years. Over 10 years it made a total return of 391.6%, the best in the sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
This is despite not holding the rallying value names but the subdued growth stocks. Below Gries detailed two stocks that have done well this year, but that would also be leaders for when the recovery is over.
ASML Holding
One company is semiconductor manufacturer ASML Holding, the largest stock allocation in the BlackRock Greater Europe Trust (7.4%).
Semiconductors have been a major story for markets this year, they are a key part to technology devices but there was a significant shortage earlier after a miscalculation by companies about the demand for products.
This occurred during the value rally, but the shortage of equipment benefited ASML Holding because it held a large market share of the semiconductor space so was able to have stronger pricing power.
The company has been a “top performer” in the trust even prior to this global semiconductor shortage, Gries said.
ASML is an example of a growth stock, which had good performance, despite the market focusing on value and still has a strong long-term picture post pandemic. The manager added that it could play well on the growing renewable energy theme coming through, as electric cars will require various semiconductors. This is alongside the continued investment in smartphones, cloud infrastructure and data centres generally as people’s reliance on tech continues to grow.
Lonza Group
Next is pharmaceutical company, Lonza Group, a stock Gries has already held in the fund for five years.
During the pandemic, pharmaceutical and companies in the healthcare sector have been especially popular, with many supplying solutions to managing Covid. Lonza was part of this, according to Gries, having helped with the development of several Covid-19 vaccines.
“It was already a strong performer before 2020 but that performance has spilled into 2021,” Gries said.
Indeed over the past year its share price has risen 36.4%, according to Google Finance data.
Lonza Group share price over 1yr
Source: FE Analytics
This performance has put the company in a “very, very strong position” Gries said, especially when it came to future growth and earnings.
Aside from products related to Covid-19 Lonza develops oncology and diabetes drugs and gene therapy treatments, all long-term healthcare issues and projects.
Gries said one of the key things he considers in his asset allocation is that his holdings operate in markets and industries, making different sources of returns and exposing them to different macro themes rather than narrowly focusing on the market.