Investing in European equities – not afraid to be “boring”

Mr Vinke, you are the portfolio manager of the EI Sturdza Strategic Europe Value Fund. Can you give us more details about its construction?

Monthly Fund Commentary
16 Apr 2015

Mr Vinke, you are the portfolio manager of the EI Sturdza Strategic Europe Value Fund. Can you give us more details about its construction?

The strategy for the fund is based on three key factors. The first is the investment process. We begin from first principles; reading the annual report, meetings with company management, etc. The investment team has a disciplined approach and uses a tried and tested proprietary valuation methodology to determine a company’s intrinsic value. 

Secondly, we are stock-pickers. We look for quality companies: market leaders, a high degree of visibility of their revenue stream, high margins, strong free cash flow and low capital intensity, which are trading at 40% discount to their intrinsic value. 

The third element is the portfolio’s concentration. We typically hold between 25 to 35 names. We believe this concentration, the investment process and quality of the companies offers the greatest framework to outperform in both up and down markets. To date the fund has an up-capture ratio of 104.7%, the down-capture far lower at 64.0% plus an annualised rate of return of 16.4%¹.

Let’s come now to your impressive outperformance versus the MSCI Europe Total Return Index and the question – how does your investment process function?

Given the way we manage the fund’s portfolio, we are agnostic when it comes to the benchmark. The EI Sturdza risk team monitors the benchmark on a daily basis; however it does not drive nor influence our investment process. As we invest in companies that are trading at a discount to their intrinsic value, the valuation process highlights companies with superior business models or “Quality Value” stocks. The methodology means companies with a high cost of capital generally do not make the grade and sectors such as insurers, utilities and oil and gas majors are underrepresented within the portfolio. 

As mentioned before, our proven, disciplined process keeps us focused and ensures we sell companies when they become overvalued. We typically want to add a new name to the portfolio each month. As we have a maximum of 35 names, each investment really has to ‘merit’ its position in the portfolio. How the portfolio looks relative to the benchmark is a secondary output, rather than an input.

That means you are looking clearly for specific sectors?

This focus may change depending on global market conditions. At the moment we are predominantly looking at consumer, consumer staples, sometimes consumer discretionary, and healthcare, software and support services. 

How do you find and select the most promising shares?

Stock selection starts by screening the European Stock universe for certain attributes. From here the fundamental research begins and the stocks are put on a watch list. We are cognisant that if you screen too much, you start to ‘see’ nothing and at times companies are transforming themselves and due to short-term issues, their long-term free cash flow generation might be ‘masked’. This is where speaking to company management teams for the last 19 years is crucial. The portfolio tends to have what you might call “boring stocks”, like Nestle but the company continues to produce single digit revenue growth year on year by adding and trimming to its brand portfolio. 

What are the prospects for European markets in 2015?

I struggle with the outlook this year more than I have in the past. Last year, growth rates in Europe were not what people thought they would be. This year, I am uncertain if the action taken by the European Central Bank (ECB) will be felt at the grass-root level of the European economies. The liquidity will impact stock markets and the divergence of monetary policy in Europe vs. the USA means the dollar will continue to strengthen. This will have a positive impact for a country like Italy where a weak euro will hopefully start to regenerate a growth in GDP. The effect of the oil price coming down will be positive for Europe generally and specifically on consumer demand.

In the short term the outlook seems positive. The risk assets will probably carry on performing given the actions of the ECB. A strong US dollar is good for corporate earnings for many of the European multi-nationals. The weakness of the Euro was anticipated and the portfolio has been well positioned to benefit from these moves. I think this has been one of the drivers for our performance over recent months. If all goes well we will start to see an acceleration of growth, especially in certain European countries which have taken on fiscal change.

There are also political risks to consider. We have Greece and the United Kingdom – the United Kingdom election will be a very close call. 

How do you manage risk in the portfolio?

The most important element of risk management for a portfolio manager is to get your stocks right. I like to keep position weightings similar because you never know where the performance comes from. None of the stocks should be at risk of blowing up a portfolio, and therefore I tend to run positions in equal sizes.

When doing stock selection liquidity is monitored and we have no micro-cap exposure. We may use derivatives to further mitigate downside risk.

Investors are also reassured by the fact that I am personally co-invested in the fund.

Some words about the Strategic Europe Value Fund. When was it launched at what domicile and how much money is invested in it?

The EI Sturdza Strategic Europe Value Fund is a UCITS IV compliant OEIC which was launched on 29 October 2010 and is domiciled in Dublin, Ireland. We currently have over EUR 425 million of assets under management.

In which countries is it licensed for public distribution? 

The fund is registered in the majority of the EU markets including Austria, Finland, France, Germany, Ireland, Italy, Spain, Sweden, Switzerland, The Netherlands and the United Kingdom. We have an experienced distribution team looking after these markets, and our thoughtful investor relations team ensures that investors can access information and people when they need it.

¹ Data based on four year rolling data to the end February 2015