Europe and the US are finished and the future is Asia. So goes one strand of investment thinking. But it's not one that Alex Darwall, fund manager of the Jupiter European Fund and European Opportunities Trust, has much truck with.
"Our fund invests in companies which happen to be listed in Europe, but which can grow very significantly and are not dependent on European Union growth," says Mr Darwall. "Geographical definitions of a company are far more complicated than they used to be, and for that reason I'm country blind."
Instead, Mr Darwall seeks companies which have strong enough intellectual property to afford geographical diversity. Contact lens maker Essilor, which is listed in Paris but has global business and manufacturing interests, including in Asia and Latin America, is one example of the type of stock he looks for.
"We seek companies which are the best at what they do, and for which the impact of digital technology means they can compete and succeed on the world stage more easily than before," says Mr Darwall.
One of the attractions of Essilor and some of his other holdings, is their revenue streams from the emerging markets. "If you want to tap into growth in areas like Brazil or Vietnam you can buy a share in a local company, or one which operates there but is listed in Europe," says Mr Darwall. "A European listing offers much greater safety and accountability."
The Jupiter European Growth Fund certain holds a diverse group of companeis. Almost a quarter of their underlying sales come from emerging markets, in contrast to 16 per cent for FTSE World Europe companies. The portfolio of the fund is similar to the UK unit trust and investment trust, which are also managed by Mr Darwall.
He adds that the broad range of revenue streams allows his funds to achieve diversity both by geography and activity despite holding a relatively small number of stocks. The Jupiter European Fund only had 37 holdings at the end of February. One advantage of a concentrated portfolio is that it is subject to company rather than systemic risk, and allows for frequent meetings with companies - around 150 a year.
Company strength
Mr Darwall places great emphasis on corporate strength. "I don't spend a lot of time worrying about the markets," he says. "If you get the company right the market will follow." The ownership structure and the management are important features, as they tell him whose benefit the company is run for. Accountability is another reason why Mr Darwall prefers listings in Europe rather than emerging economies.
The team also assesses whether a company's business taps into a long-term structural trend. An example is the use of technology in agriculture, or growing health problems such as diabetes. The portfolio includes Novo Nordisk, a major insulin producer listed in Copenhagen, but with a global business. Mr Darwall says there are high barriers to entry in this business, while Novo Nordisk has demonstrated the strength of its model and exhibited superior growth.
Holding a company with a strong offering means it can ride out times when its domestic currency is strong, which has been the case with the euro recently, affecting some exporters. "It is a good test of a company as to whether it can compete regardless of the exchange rate - we don't want holdings whose prospects depend on this," says Mr Darwall. He adds that his stocks collectively trade in so many parts of the world they are not reliant on one exchange rate.
Finally he looks at a company's valuation. "We have a tolerance for a short-term higher than average price-earnings ratio (PE), but an intolerance for a short-term below average PE if it is a lousy company," says Mr Darwall. "I might buy a business if it is on a lower than average three to four year PE."
PIIGS out
Mr Darwall has a very low allocation to the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) economies in his portfolios. However, he says this is not because of testing macro-economic considerations in those countries.
"The reason not much is invested in PIIGS is not because of the Greek problems, but because whenever I have looked at the companies in these countries, I cannot find what I'm looking for. For example, there are a lot of utilities and banks listed there and these don't attract me."
He freely admits this means missing out on any 'relief rallies' in those markets. "We don’t get involved if we don't like the business, and we don't want to be heroes - we are not looking for a short-term bounce, for example, from Greek banks."
He's also light on commodity stocks, mindful of the risk that a slowdown in China could hit raw materials exports to that part of the world.
Danegeld
His focus on long-term out performance, looking to lower real risk with a view to better returns, has resulted in high exposure to Denmark (18 per cent of assets in the unit trust and 17.8 per cent in the investment trust, the second and third largest exposures respectively). Mr Darwall stresses this is not because he is investing in Denmark, but because he has found strong companies such as Novo Nordisk and Novozymes - the two top holdings in both portfolios.
Mr Darwall says his investment approach continues to be appropriate as globalisation continues. He adds: "Conditions are ripe for this kind of approach because economic conditions favour the good companies. As their competitors retrench they can take market share."
| Alex Darwall CV |
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Alex Darwall has been manager of the Jupiter European Fund since 2001 and European Opportunities Trust since 2000. He joined Jupiter in 1995 to run the European portion of segregated pension fund accounts. From 1992 to 1995 he was a French equity analyst at Goldman Sachs. Mr Darwall has a degree in history from Cambridge University. |
