- “Quantitative easing does not address Europe’s more fundamental structural problems”
- “Our focus is to try to find companies with the entrepreneurial drive to bring new products and services to market that consumers willingly pay for”
- They find companies with characteristics they like in technology, healthcare, industrials and the media
- The manager follows this 3 long term trends: global growth; application of digital technology; and change in regulations
Alexander Darwall, fund manager of the Jupiter European Growth Fund, explains in this interview with Funds Society that he does not invest depending on the macro evironment: he looks for successful companies that, tapping into secular rather than simply macro growth drivers, will be well rewarded. And he follows this 3 long term trends: global growth; application of digital technology; and change in regulations.
How optimistic are you regarding Europe’s growth, and what about European companies?
We are optimistic about European companies that put their expertise to use to develop world-leading products and services. Our aim is to build a portfolio of such world-class companies that tap into long term structural trends such as the impact of technology, globalisation and changes in regulation rather than taking a view on the macroeconomic cycle.
Will the credit boost be the main driver of the economy recovery? Which other factors?
Improving credit conditions in Europe are welcome news. However, we believe that the liberalisation of markets, ongoing globalisation and structural reforms are required to sustain economic growth. Our focus is to try to find companies with the entrepreneurial drive to bring new products and services to market that consumers willingly pay for.
How could the growth picture affect equity markets in the next months? Do you expect a rally in European equities?
We do not take a view about where equities will trade in the next few months. We look for strong, proven business models whose success is determined to a large extent by their own efforts rather than by the general macro environment. These companies tend to tap into multi-year structural drivers, such as the rising incidence of diabetes or the application of new digital technologies, such as digital payments. By way of example, 7 holdings with an average weight of 29% have been in the portfolio for over 7 years (as at 31 July 2015), demonstrating that we do not sell a sensible business model when market sentiment turns negative, which it periodically does. This is where our focus on meeting corporates rather than the sell-side is crucial – as a team we meet 200 or so corporates a year – as the stock market is prone to panic at the top and bottom of the market. In summary we are confident that with a good degree of patience, successful companies tapping into secular rather than simply macro growth drivers will be well rewarded.
There is much consensus about the attractiveness of European equity at the moment… Could this be dangerous?
We look for market leaders with a favourable market structure, focussing on the fundamentals, and do not spend our time worrying about the macro picture and short term market volatility. Valuation is intrinsically difficult and we approach the subject with due humility. Our view is to try to identify companies that have the ingredients for success that we look for and to subsequently decide what we are willing to pay for them. This is the key difference between an investor and a speculator; an investor invests in a business imagining it to be unlisted and with a view to never selling it, while a speculator’s focus is to find someone to buy the asset off you at a higher price and to forecast changes in market sentiment. Deciding on price before choosing what it is we want to buy is not an approach we favour.
Our starting point for an investment is to ensure that a company is managed for the benefit of minority shareholders. We then look for the right ingredients, which are summarised in the following 4 sequential steps: The ‘right’ company (the company offers a core competence that differentiates it from competitors and which it can monetise. Typically, we are drawn to companies that are less capital intensive and have more intellectual property); The right management (the business is presided over by an excellent management team and has a strong corporate governance and company culture); Structural trend (the company has a number of growth options and taps into clearly identifiable multi-year structural trends); Valuation (we are of the belief that where we are right about the first three steps, we tend to have positive surprises, which is the inverse of the ‘value trap’, where we are wrong about the inputs).
Are Central Banks helping to generate a bubble in European equities?
Our view is that quantitative easing does not address Europe’s more fundamental structural problems. We are confident that companies offering a special product will be well rewarded, if we exercise the right degree of patience.
Do you think last corrections due to the Greek crisis could generate opportunities to buy?
Greece or its consequences for stock markets has no direct bearing on our portfolio, as we try to be invested in companies for whom the outcome is not a pressing concern.For all our investments, first we identify what assets we would like to own; then we decide on price. We have nothing against Greece, but we have not identified the ‘right’ companies there: world-beating companies offering differentiated products that consumers are willing to pay for. As such, we do not have any holdings listed in Greece. Most of the companies in the portfolio are global in nature. As at end of June 2015, approximately 80% of the portfolio is invested in global businesses that happen to be listed in Europe; the remaining 20% of the fund in invested in companies that operate in Europe. No single company in the portfolio has any significant exposure to Greece.
How do you see Greece agreement with Europe and what do you think it could mean to the markets?
Typical concerns for the companies in the portfolio are the impact of technology, regulations, consumer habits, as well as managing the lifecycle of their product, commoditisation, and motivating employees in the Research and Development department. Predicting the macro is extremely difficult, so our focus is to stick to our strengths: identifying successful business models, looking for patters of success across sectors from our investment experience.
How does the Euro contribute to the impulse of the markets and in which levels do you see it vs dollar?
As with the macro, we spend no time trying to predict foreign exchange, as we try to be invested in companies for whom the FX is not a pressing concern. Most of the companies in the portfolio sell their wares globally, so at any one time they are gaining and losing from FX; they tend to take translation risk rather than transaction risk. These companies do not rely on the exchange rate to succeed. Instead, their priority is bringing the best product or service to market. Many companies have been in the fund for many years, during which time they have benefited and suffered due to the FX, but that has not been the key determinant of their success.
In which companies or sectors do you have more convictions?
As investment specialists, we look for companies with similar characteristics across sectors, such as a differentiated product, free pricing, high barriers to entry, Intellectual Property over Capex and a proven track record. We do not tend to find companies with these characteristics in utilities (regulated pricing) or in commodities, real estate and mainstream financials (lack of differentiation). The areas in which we find many of my ideas are technology, healthcare, industrials and the media.
While we aim to put together a portfolio of unique, uncorrelated companies, the holdings can be loosely grouped under three structural long term trends: Global growth (companies tapping into global growth, such as healthcare); Application of Digital technology (for example, business benefiting from the growth in ecommerce); and change in regulations (for example, disruptive business models that are benefiting from the mainstream banks being capital constrained).
How positive are you on banks? Why?
Historically, the fund has been structurally underweight the financial sector. We have tended to be underweight the mainstream banks and insurance companies. To us, banks have an undifferentiated offer, they have a lack of pricing power and they rely on macro factors that are out of their control such as interest rates move, monetary policy, currencies etc. We favour ‘alternative financials’ that are benefiting from changes in regulation. There is an unmet demand for credit and while mainstream banks are rebuilding their balance sheets and retrenching from non-core areas. For example, Provident Financial offers financing to non-standard lenders in the UK which they would otherwise not receive from the mainstream banks.
Core Europe or peripheral? And what’s about Spain?
It is never for me a question of core Europe versus peripheral Europe but rather more whether my analysis of a company demonstrates that it has excellent long-term growth prospects, is exposed to growth in global trade and productivity and has a future, as far as is reasonably possible that depend on their own efforts and not on factors beyond their control.
Spanish-listed companies accounted for around 7.6% of our portfolio as at 30 June 2015. We have two companies with headquarters in Spain, Amadeus and Grifols. Amadeus is a global software leader offering a Global Distribution System to airlines and travel agents across the world. They derive less than 50% of their revenues in Europe. Grifols is another global pharma leader manufacturing plasma-derived (blood) products. More than 60% of the company’s revenue is generated in the US. These companies tend to operate globally which offers proof of concept for a company offering a differentiated product or service.
The above commentsrepresents the views of the fund manager at the time of preparation (August 2015) and may be subject to change. Readers should be aware that they should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided, but no assurances or warranties are given.