Over the past few years Europe has been associated with a number of problems including debt and poor economic growth, which have been a turn off for investors. However, Tim Stevenson, manager of Henderson Eurotrust (HNE), is finding opportunities in several sectors.
The trust's largest exposure is to industrials which account for more than a fifth of assets, but while a number of them rely on the economic cycle, for example, Swiss engineer ABB (ABBN:VTX) and France-listed electrical installer Legrand (LR:PAR), other 'industrials' are different in nature, according to the trust's manager Tim Stevenson.
For example, employment agency Adecco, on which he thinks "the markets are too gloomy." Sodexho, meanwhile, not only provides catering services but also facilities management, and its margins are improving. "There is also no doubt in terms of its global presence – this is outstanding," he adds.
"But I am quite cautious on pure mechanical engineering companies as they are competing against Japan and the devaluation of the yen. Life is tough for these and they are constantly cutting costs. We are in a very slow recovery and period of low economic growth – even lower than I thought it would be."
The slowdown in emerging markets is another potential headwind for exporting companies - many German companies, for example, rely on emerging markets exports. But he adds:
"If a company was totally reliant on exporting to emerging markets this would be a problem but (cosmetics company) L'Oreal (OR:PAR), for example, makes about 40 per cent of its sales in this area and in terms of its goods there is still a lot to be sold into these areas. In China the overall wealth effects are coming through because people want brands.
"We have bought back Essilor (EI:PAR), meanwhile, because there is a lot of need for eye tests and sight correctives in emerging markets."
Tim Stevenson CV Tim Stevenson is manager of Henderson Eurotrust and director of European equities at Henderson Global Investors, where he has worked as a fund manager since 1986. Between 1984 and 1986 he worked at Aetna Montagu Asset Management where he was responsible for European Investments for ERISA clients and MIM Pension Funds. Before this he was a European analyst at Savory Milln. Mr Stevenson graduated from Sussex University with a BA (Hons) in Economics and European Studies. |
Mr Stevenson thinks a lot of European companies' earnings levels could improve, citing research (by Goldman Sachs and Citi Group) that suggests they could grow 5.4 per cent this year and 13.2 per cent in 2015, in contrast to declining by 4.3 per cent last year.
Another area Mr Stevenson likes is car component suppliers and in the trust's last financial year he added Continental (CONX:GER) and Autoliv (ALIV SDB:STO), and already held Valeo (FR:PAR). "All these companies are seeing increasing sales as cars are becoming more high tech," he says.
The trust also has around 17 per cent of its portfolio in healthcare but in this area Mr Stevenson favours medical equipment companies rather than pharmaceuticals, examples being top 10 holding Fresenius Medical Care (FMEX:GER).
"My portfolio has more expensive positions as I tend to pay up for quality," he adds. "This way you get a better return on equity (RoE) and dividend growth: my holdings' forecast dividend growth is around 16.8 per cent against 8.8 per cent for the index."
The trust's portfolio has a return on equity of 13.7 per cent against 12.3 per cent for its benchmark, FTSE World Europe ex UK, while its 1 year forward price-earnings ratio is 14.8x against 14x for its benchmark.
High quality names are also useful for protecting against choppy markets. "People don't want to know about quality reliable names so I can take the opportunity to add to names such as Deutsche Post (DPWX.N:GER)," says Mr Stevenson. "I have been using recent weakness to gradually add to quality names, and we have much of our borrowing facility available for use."
The trust has a borrowing facility of £15m, which its lending bank has agreed to raise to £20m. The trust had only used around £4.8m of this at the end of September.
However Mr Stevenson has become more cautious on financials. "We are not necessarily avoiding banks and most have made provision [for possible fines]," he says. "But I am underweight for a whole bunch of other reasons, for example, valuations are too optimistic, and every single bank has probably got things they wish they hadn't done and will come back to haunt them. Banks won't get back the same level of profitability as in the past so I am very selective on which I hold.
"But I have reasonable exposure as there is recovery in some banks. ING (INGA:AEX), for example, is a turnaround story with good growth potential while I hold UBS (UBSN:VTX) for its asset management capability."
However, UBS was one of the main detractors from performance over Henderson Eurotrust's last financial year and the size of the holding has been reduced to around 1.4 per cent of assets so that it is no longer in the top 10 holdings. "UBS has been disappointing as it looks set to incur heavy fines from the US authorities for various alleged misdemeanours," explains Mr Stevenson.
Other detractors from performance in the trust's last financial year include Deutsche Post. "But otherwise it has been a good contributor to the portfolio and I expect a big return over the next 12 months," says Mr Stevenson.
This remains the trust's largest holding accounting for 5.2 per cent of assets at the end of September.
Like a number of overseas focused funds, Henderson Eurotrust has had to deal with the strength of Sterling against foreign currencies. "Sterling up around 10.5 per cent against the Euro (over the trust's last financial year to 31 July) has been a major headwind, though I don't anticipate it appreciating by the same amount over the next six months," says Mr Stevenson.
And despite the movement this only detracted from the trust's returns over that period by 0.1 per cent.
