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Online Extra: "No Place for a Buy-and-Hold Strategy"


European stock markets underperformed most others in the first three months of this year. Concern about economic weakness, worries over Iraq, and a surge in oil prices unnerved many investors, driving them out of stocks into bonds and cash. All funds that focused on Europe lost money.

One that did better than most was the $230 million DIT-Lux Small Cap Europa fund, by Allianz Dresdner Asset Management. It focuses on small and midsize outfits across the euro zone and lost just 1.5% in the first quarter, making it the second-best-performing fund investing in companies on the Continent. Its manager, Frank Hansen, discussed his approach with BusinessWeek European Economics Correspondent David Fairlamb. Following are edited excerpts of their conversation:

Q: Why are small- and midcaps attractive?

A: Because there are so many companies to invest in that you can always find plenty that aren't being hurt by the dismal economic environment. Large companies, by contrast, tend to behave in the same way.

Q: So you're basically stock-pickers?

A: Yes. But we do have some sector preferences. For instance, we're underweight in financials and overweight in technology. Both choices helped us over the past quarter.

Q: Why?

A: Financials have been more badly hurt than most by the stock market downturn. You just need to look at the way insurance and banking stocks have performed in Europe in recent months to see that. Technology, by contrast, is recovering from two years of underperformance and is now doing better than most stocks. But good stock-picking is ultimately the key to success. Even in a flat market a lot of small and midsize stocks are moving up -- even in Germany, where the market as a whole has been particularly weak over the past two years.

Q: What do you look for in the companies you invest in?

A: Our basic strategy is to look at valuations and find stocks that are cheap. We then look for the ones with the best dividend yields and growth prospects and the most opportunistic managements.

Q: Which companies did you go for last quarter?

A: One was Buderus, the German heating-equipment company. It was taken over by [German engineering outfit] Bosch in the first quarter, giving us a very nice profit. It was one of our top-10 picks. Then there's Puma, the sports-shoes and clothing company, which is also German. It's our biggest weighting and has surprised on the upside because it has shown continuously strong growth, even though consumer demand in general has slowed.

We're also shareholders in Bilfinger Berger, a construction company. Although the construction industry is depressed, Bilfinger is doing well. It also got a boost in the first quarter because it had a large stake in Buderus and made a lot of money when Bosch bought it.

Q: You mentioned technology. What tech companies are hot?

A: We like Kuehne & Nagel International, the logistics company, which has seen strong growth despite the economic slowdown, and Fresenius, the life-sciences, health, and consumer-products firm.

Q: Now that the war in Iraq is over, do you expect a general recovery in share prices?

A: Not this year. We saw a big sell-off in the first quarter because of political uncertainty. Now there's an upswing because the war in Iraq is over. But this isn't the start of a longer-term rally. It won't amount to much in the medium term. So investors have to be opportunistic and flexible. There's no place for a buy-and-hold strategy in this market. Active management is needed.

Q: What positive news do you see for investors?

A: We expect more takeovers and consolidation this year. Share prices are lower, so acquisitions are more attractive, and in this sluggish environment, stronger companies have the resources and power to make acquisitions.


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