Concentrating a portfolio to express higher conviction is the best way to generate alpha in Europe, according to Stefan Gries, who runs the £426m BlackRock Greater Europe investment trust, the best performer in the eight-strong IT Europe sector on a five-year basis.
Gries (pictured) – who manages the trust alongside Samuel Vecht – attributed performance of the trust to having a clearly defined investment philosophy, a clearly defined stockpicking criteria, and a high conviction, with about 39 holdings. 
“We concentrate the portfolio, and with that, express greater conviction and try to maximise the alpha that is coming out of the Europe,” he explained.
“That means is you build so much conviction that you feel comfortable running bigger active weights in the stocks and companies you really believe in.”
Whenever he approaches a new idea for a stock, he asks himself: “Why can I own this company for the next three to five years? What are the income streams I’m tapping into? And why does this business lend itself to wealth and value creation?”
He also places great emphasis on businesses where he can trust the management team, where the strategy is clearly defined with a clear idea of the returns on capital invested.
He said: “We look for businesses where they generate a lot of cash organically, because that creates optionality to invest in attractive projects had high returns.”
This is largely a result of his two fundamental beliefs: first, “If a business doesn’t earn a healthy spread of its cost to capital, there is no value in wealth creation”; and second, “if there is no growth, there’s also no value creation”.
Looking back, Gries recalled how the businesses the trust owns have come through strongly because in many cases the management teams have executed their strategy well.
He said: “They tapped into new opportunities, they were growing at very high returns on capital employed and thereby creating wealth in the process and ultimately, most of these businesses over-delivered on earnings and cash flows.”
However, over the last few years, he admitted that there have been periods where his investment philosophy has been tested.
Gries said: “There’s always been a narrative in the market that tempts you to change your portfolio.
“In 2017 it was the elections in Europe everyone was worried about and ultimately they make no difference to the businesses that you own.
“In 2018 you had a massive sell-off in the fourth quarter, still made no difference to the businesses we own.
“If you shift your portfolio in Q4 2018 because the market is moving defensive for four weeks, you’re not going to participate in the rally that then transpires in the first half 2019, which is exactly what happened.”
He added: “Doing nothing sometimes can be the hard thing to do, but it is the absolute essential thing if you want to create long term value.”
In March of this year during the strong volatility in asset prices as a result of the spreading coronavirus pandemic, he leaned heavily on his process to stuck to his positions.
During the sell-off he asked himself whether the coronavirus was going to change the trajectory of some of the income streams he was tapping into, and the answer in 90 per cent of cases was ‘no’.
He recalled how during the first quarter of 2018, many investors were optimistic about buying European banks.
“It was global synchronised growth, every single indicator was hitting multi-year highs, inflation was coming back, central banks were going to tighten, buy European banks,” he said.
“I just asked myself the question, if I buy a southern European bank today, can I sit in front of my board and say, I bought bank ‘x’ and I’m highly confident I’m going to own it for the next five years?”
He said it took him two seconds to work out that decision.
“So, if you think like a business owner rather than a trader, and you look for the right features and you take a long term approach, I think it can be really quite powerful.”
“I've got a very strong belief that you need certain building blocks to be in place for wealth creation to happen, and it doesn’t happen in sectors that are going backwards in terms of top-line growth and low returns, of which we have quite a few in Europe.”
“I think that’s why it’s also important to take an active approach to investing in Europe.”
Gries, who also runs a European long/short fund, said that this approach helps him avoid any ‘blind spots’ in the market.
He explained: “We basically look at everything, we turn lots of stones all the time, and the chances are that if there is a part of the market where I’m underweight in this trust, I’m running high conviction, short cases in my long/short-fund.
“The way I think about it, I want to be high conviction both ways, in my overweight and in my underweight.”
He also added that it helped to have one of the best resourced teams in the market at BlackRock: “You can't do this in a group of two or three people. I've got more than 17 people with me, where we cover the market by sector.”
Performance of the trust versus index & sector over 5yrs
Source: FE Analytics
BlackRock Greater Europe has delivered a total return of 121.18 per cent over the last five years, compared to 65.22 per cent from the average peer in the IT Europe sector and 64.28 per cent from the FTSE World Europe ex UK benchmark.
It has a dividend yield of 1.2 per cent, is trading at a 1.3 per cent discount to net asset value (NAV), and has ongoing charges of 1.01 per cent.