Europe’s top three equity-fund managers since the post-financial crisis market bottom all agree on one thing: banks are bad investments.
Allianz SE (ALV)’s Europe Equity Growth Fund, Comgest Growth Europe Fund (COMGREA) and Montanaro European Smaller Companies Fund (MONESCF) produced the best risk-adjusted returns since March 2009 among European stock funds with more than 500 million euros ($667 million), by bottom-up stock picking and staying away from banks, according to the BLOOMBERG RISKLESS RETURN RANKING. The three managers -- Thorsten Winkelmann, Arnaud Cosserat and Charles Montanaro -- are still not buying.
“I don’t see ourselves buying into any of the banks anytime soon,” said Frankfurt-based Winkelmann, 39, whose 145 percent return over the period in his 3.5 billion-euro fund was the best in both absolute and risk-adjusted terms. “You ask the CEOs of the banks about their return-on-equity targets, and they can’t tell you. How can a third-party fund manager know and put his money there?”
The top-performing managers are unfazed by European Central Bank President Mario Draghi’s moves to shore up the region’s banks, which made financial stocks the STOXX 600 Index (SXXP)’s best performers in the past year. Instead, they prefer stocks such as Swedish radiation-surgery manufacturer Elekta AB (EKTAB), owned by all three managers, that have simpler business models, predictable cash flows and the biggest shares of niche markets. Banks don’t fit the bill, they say.
“These companies are opaque, making them hard to value with any degree of confidence,” said London-based Montanaro, 57. “To make matters worse, their destiny is often outside their control due to regulatory and political intervention. Therefore, we see them more as highly cyclical trading stocks and not for us.”
Montanaro, whose 1.1 billion-euro fund focuses on companies with market values of less than 3 billion euros, has returned 113 percent since March 2009 and 6.87 percent after adjusting for volatility. It was only beaten by Winkelmann and Cosserat’s funds, which returned 7.59 percent and 6.92 percent respectively, after taking into account price swings.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Cosserat, 48, returned 95 percent since the market low of March 2009. His 2.1 billion-euro Comgest Growth Europe Fund had the ranking’s lowest volatility, even though it only holds about 30 stocks.
“We focus on companies that deliver what we expect and deliver on earnings expectations,” he said. “Earnings of other companies tend to swing much more wildly. That means the market is more volatile than the companies we invest in.”
Cosserat, who manages his fund in Paris with Laurent Dobler and Franz Weis, has Arteixo, Spain-based Inditex SA (ITX), the world’s largest clothing retailer, and Walldorf, Germany-based SAP AG (SAP), the biggest maker of business-management software, as his top two holdings. The stocks are also in Winkelmann’s biggest three positions.
“You should expect a company with its headquarters in Spain related to consumers to do extremely poorly,” said Winkelmann, who manages 8 billion euros across Allianz’s funds. “They have mastered this fast-fashion business model. They are expanding into new regions and in emerging markets like Asia or South America.”
Inditex has more than tripled and SAP has more than doubled since March 2009 in spite of recession in Europe and slow global growth. The STOXX 600 Index is up 87 percent in that period while the STOXX 600 Banks Index (SX7P) returned 62 percent.
Their top market shares, pricing power and operational effectiveness mean Inditex and SAP can still grow strongly in tough economic conditions in developed markets and produce predictable cash flows, according to Cosserat. That’s not the case with banks, he said.
“Banks have always been extremely sensitive to the cycle,” he said. “In the short term, they tend to bounce up and down, but in the long term they don’t deliver any profit growth, and they don’t deliver any performance. They are accident prone.”
The financial crisis of 2008 required governments around the world to use trillions of dollars of taxpayers’ money in bailouts and guarantees to prevent their banks from collapsing.
Since then Zurich-based UBS AG had a $2.3 billion trading loss, Bankia SA (BKIA) required a bailout by the Spanish government and U.K. lenders paid out 11 billion pounds ($18 billion) to cover insurance mis-selling. HSBC Holdings Plc (HSBA) and Standard Chartered Plc (STAN) were fined last year for failing to prevent money laundering. At least 16 banks are being investigated by regulators for their involvement in fixing the London Interbank Offered Rate, the biggest scandal in banking history.
The ECB’s decision to buy European sovereign debt, Draghi’s pledge to do “whatever it takes” to defend the euro and a European Union plan for a bank union supported bank stocks last year. They were the best-performing industry in the STOXX 600 Index in the past 12 months, rising 31 percent compared with the index’s 14.6 percent increase.
That’s helped managers such as David Herro, who manages the $11.8 billion Oakmark International Fund (OAKIX:US), and Sanjeev Shah, who runs Fidelity Worldwide Investment Ltd.’s 2.4 billion-pound Special Situations Fund, bounce back to the top 2 percent of peers from the bottom third in 2011.
“The recovery in financial shares last year was not unexpected and may have a little further to run,” said Montanaro, who compares his hobby of visiting previously undiscovered tribes in the Amazon and Papua New Guinea to discovering undervalued stocks. He completed a degree in anthropology from the U.K.’s Durham University in 1976 and has visited tribes such as the Korowai and Kombai in Indonesia and the Yanomami in Venezuela, according to his website.
Montanaro plans to play the rebound in financial stocks through Aberdeen Asset Management Plc (ADN), a U.K. money manager that specializes in Asian funds and is raising its dividend after a string of acquisitions during the financial crisis. Aberdeen is up 82 percent in the last 12 months.
All three fund managers had below-average volatility, according to the ranking, and they hold stocks for long periods. Each fund trades less than 30 percent of its portfolio a year, the managers said. That compares with 78 percent for the average European equity fund that invests in large companies and 66 percent investing in small firms, according to Morningstar Inc. (MORN:US)
Winkelmann credits the “quality and stability” of the stocks in his fund for its stable return profile, he said. Montanaro, who has run his fund since 2000, said he monitors volatility closely and reduces the number of companies in his fund during difficult conditions. As the firms left in the fund are those with the strongest balance sheets, price swings are minimized, he said.
Winkelmann is betting SAP and Inditex will continue to outperform the market over the next 12 months and has been buying Danish brewer Carlsberg A/S (CARLA) for its profit margins and market share in emerging economies such as Russia.
Cosserat likes ARM Holdings Plc (ARM), the Cambridge, England- based designer of the most popular chips for smartphones, Italian luxury goods maker Prada SpA (1913) and Amsterdam-based Gemalto NV (GTO), which makes smart-chips for mobile phone payments.
Montanaro’s biggest holding is U.K. industrial firm Victrex Plc (VCT), which has a “virtual monopoly” on a type of metal-like thermoplastic that is being used in cars, aircraft and the medical profession, he said.
“I guarantee that there are tribes in remote jungles blissfully unaware that white men even exist, just as there are really good, fast-growing quoted small companies unknown to the investing community,” Montanaro said. “You just have to leave your office and go out and find them.”
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