With the future path of the Covid-19 pandemic and its impact on the economy incredibly uncertain, Rory Powe, manager of the £2bn Man GLG Continental European Growth fund, is sticking to investing only in Europe’s strongest companies.
Despite the name of the fund, Powe thinks the debate between growth versus value is misplaced, and that the focus should instead be on individual companies.
“I think many so-called growth stocks will struggle in the next five-to-10 years and quite a few value stocks will perform very well,” Powe said. “It’s all about stock-specific selection and getting the right idiosyncratic risk in the portfolio.”
While many of the most successful global growth funds are focused on US or Chinese markets, he believes investing in Europe is not about participating in the economic growth of the region, but about investing in the strength of its companies.
Indeed, he revealed that 90 per cent of the value of the fund is invested in companies that are global, and less than 5 per cent derive their revenues only from Europe.
“If your backyard is small and you are ambitious, you will expand globally. That’s what we try to capture in the European fund,” he explained.
The Man GLG Continental European Growth fund runs a highly concentrated portfolio of 30 stocks, where the top 10 account for more than half of the £2bn fund.
Running a concentrated fund means stock selection is paramount for Powe.
“We refuse to compromise on quality and will continue to be ruthlessly meritocratic with our stock selection,” he explained.
Put simply, he prioritises companies with “extremely strong competitive franchises and where we think those will be sustainable for many years into the future”.
“What we don’t want to do is to invest in companies whose fortunes rely on the macroeconomy when the outlook is so uncertain,” added Powe.
One of the fund’s highest conviction investments is Danish bioscience company Chr. Hansen, where it has a 7.21 per cent position, just below its largest holding software provider SAP.
Powe explained that Chr. Hansen’s fortunes don’t rely on the fortunes of the macroeconomy and that it’s in a very defensive area. At the same time, it is still growing structurally as yoghurt and cheese manufacturers rely more on third-party providers such as Chr Hansen rather than fermenting their own cultures.
“They are essentially selling consumables and approximately 1 billion people every day devour a product which has a Chr. Hansen ingredient inside of it, and they get hungry the following day,” he added.
Powe said Chr. Hansen’s market share globally is greater than 50 per cent, and it has been growing consistently.
He also estimated that approximately 90 per cent of Chr. Hansen revenues are for products that are consumed in the home. And it is also a beneficiary of the significant shift from food services outside of home to within the home since the pandemic began.
“The fact that their probiotics bring health benefits to consumers who today are particularly preoccupied by the effectiveness of their immune system or how healthy they are, this is a big trend which I’m sure evidently the pandemic is going to reinforce,” he added.
Another beneficiary of the pandemic and lockdown has been restaurant takeaway platform Delivery Hero, which the fund has a 6.08 per cent weighting to.
The stock has rallied significantly since lockdown began, but Powe thinks the company still has significant headroom to grow.
Performance of Delivery Hero YTD
Source: Google Finance
“They’re active in 40 countries worldwide, and they are number one in over 35 of those countries,” Powe explained. “If you take those countries as a whole, the penetration represented by app-based ordering or e-commerce related ordering of takeaway food is still less than 15 per cent.”
“Ordering over the telephone still accounts for at least 80 per cent of transactions and when you look at the UK or Denmark, the penetration of app-based ordering is approximately 50 per cent, so there’s still a lot of room for online ordering of takeaway food to develop.”
“One thing we really like about Delivery Hero is that they’re obsessed with making sure the end-user has a good experience.”
With over 600,000 restaurants now on the platform worldwide and as this number keeps rising, Powe said that it becomes a virtuous circle for the company because the more restaurants appear on the platform, the more consumers go to it, and the more consumers and traffic there is, the more restaurants want to be listed on it.
“We are ordering more food from restaurants to be delivered to our homes and the pandemic has accentuated that phenomenon on the whole, but these trends were taking place beforehand,” he added.
While it’s not the biggest position in the fund currently, one of the biggest contributors to Man GLG Continental European Growth’s past performance over the last five years has been semiconductor company ASML, whose share price has more than tripled over the period.
Performance of ASML over 5yrs
Source: Google Finance
While it remains in the fund’s top 10 and a core position, the fund has recently trimmed it to 4.6 per cent of the fund to keep its position size under control.
“Because they’ve got such a high market share of over 80 per cent in the lithography industry, and given that industry essentially serves the semiconductor industry, you can’t completely divorce ASML’s prospects from the macroeconomy,” Powe admitted.
“If there is a really bad downturn, even though we don’t expect it, it could have an adverse effect on demand for smartphones, but also for more infrastructure-related investments, like data centres.”
He also said any delay to the roll-out of 5G might also affect demand for semiconductors, but that despite this, he remains very bullish on the company.
“It’s really at the sweet-spot of what we would call transistor shrink, or semiconductor industry’s determination to keep improving both processing power and its productivity,” he explained.
Some of ASML’s machines, which sell at over $125m per unit, are crucial to enabling the producers of semiconductors to pack more into smaller dimensions.
When considering the capital expenditure plans of the semiconductor industry, Powe said the spend on semiconductor lithography, is likely to grow as the share of that total capital expenditure, and ASML is extremely dominant in this area.
While investors may not get excited about European companies, Powe points out that the small European nations are often the ones who create great companies.
Chr. Hansen is Danish but serves 1 billion people around the world, ASML is Dutch but dominates the semiconductor market globally, and Delivery Hero started in Sweden, listed in Germany, and now serves over 40 countries worldwide.
Performance of the fund vs sector & benchmark over 5yrs
Source: FE Analytics
Man GLG Continental European Growth fund is topping performance charts over the last five years where it is the second highest performing fund in the IA Europe Excluding UK sector, second only to the £1.7bn Baillie Gifford European fund.
It has delivered a total return of 105.18 per cent over the past five years, compared with 49.54 per cent from the average IA Europe Excluding UK peer, and a 53.69 per cent gain for the FTSE Europe ex UK benchmark. It has an ongoing charges figure (OCF) of 0.9 per cent.