Jupiter head of European equities Alex Darwall discusses the prospects for companies on the Continent in a muted growth environment.
Alex Darwall is head of Jupiter’s European equities team and one of the firm’s most senior fund managers.
He has managed the Jupiter European fund since 2001, and has consistently delivered top-quartile returns. According to Morningstar, the fund is ranked fourth out of 79 vehicles in the IMA Europe ex UK sector over five years to 28 June, up 65.7% compared to a sector average of 33.9%.
Over three years, it takes third place with a return of 11.7% against an average fall of 14.8%, and over one year it is ranked fourth, up 34.6% compared to an average sector increase of 19.3%.
What is your investment process?
The Jupiter European fund is very different to most European funds in that I do not run it as a way to “play” Europe. As such, I am not unduly concerned with index risk but I am very concerned about company risk.
Europe is home to many world-class businesses. The kind I look for have a unique product or service that gives them strong growth prospects – not only in their local markets but internationally. The fact they are successful on the global stage means they are less likely to be affected by domestic issues.
I want growth companies. I have a clear model for the type of businesses I consider to be long-term winners: they are providers of specialist products or services often protected by intellectual property rights; they command oligopolistic positions in areas of long-term structural growth. Thus they have little need to weaken their balance sheets by loading up on debt in order to supercharge pedestrian earnings.
They have highly competent management teams, are not dependent on currency fluctuations, do not operate in regulated areas and are not part-owned by the French government.
I am out to invest, not to speculate. I avoid herd behaviour and remain disciplined in my approach. My focus is on understanding companies. I have long experience of understanding both the hard factors, such as economics, history, industries, finance, as well as the soft factors like company culture and institutional trading behaviour.
As a rule, I typically avoid banks because I consider it impossible to fully appreciate the balance sheet risks. If I cannot understand something I will not invest in it. I stick to my disciplined approach. In addition, I am not particularly interested in most cyclical companies and am generally underweight in commodities.
The investment process begins with the generation of ideas. There is a screening process with a qualitative overlay. Each day I read the news on around 30 companies. I hold around 150 company meetings and presentations each year across sectors. This provides a shortlist of possible investments. I then do deeper research on these and hold further meetings with their management. Jupiter has good contacts. If I want to understand an industry I can meet with the best brains in the business to explain it to me.
It may seem an obvious point but I do seek out honest, accountable management. If they cannot be honest with themselves then they will not be honest with me. So I never invest in a company where the management claim to have never made a mistake.
The next stage of the investment process is stock selection. This is based on my aim of owning the right company with the right management. There must be a long-term structural trend to drive the growth of the business over years rather than months. The final consideration is valuation. Rather than have a target P/E, I aim to buy the shares when there is an asymmetric risk/reward.
This results in a typically concentrated portfolio with around 70% in global winners – companies with strong business franchises and/or strong technology. These often have strong sales growth in emerging market economies. The remaining 30% is invested in companies with strong, sustainable local franchises.
I do all my own analysis and try to be patient and disciplined. I will often follow a company for many years before actually making an investment. For example, Aixtron makes the machines that make light emitting diodes. Almost 80% of its business is in Asia. I first invested in 1998 and sold in 1999 at a gain of around 200%. I then met the company twice a year for the next ten years before deciding to invest again in the autumn of 2009.
What are the reasons for the fund’s outperformance over the last year?
Performance in the year to the end of May has been predominantly stock-driven. The fund has performed so well compared to its benchmark and sector over the past 12 months because its main holdings – which include Novo Nordisk, Vopak, Novozymes, CGGVeritas, bioMérieux and Aixtron – have weathered the global slowdown better than many of their peers.
As such, they have largely delivered stronger profits growth than expected by most analysts and their share prices have risen to reflect this superior performance. In addition, there were relative benefits from not holding utilities or commodities and being underweight in financials where our stockpick, DnB NOR, performed strongly.
What changes have you made to the portfolio in recent months?
Apart from regular portfolio management duties such as top slicing strong performers and building up smaller holdings, there have been two new purchases this year. We opened a position in Vallourec, which expects strong demand for its unique tubing from the oil and gas industry. We also opened a new position in Eutelsat Communications, which leases space on its satellites to broadcasting groups. Strong secular demand for satellite TV channels and high definition TV is driving growth.
How will the fund develop in the next year?
The world economy is out of intensive care but much of the West remains in convalescence. Governments that absorbed bad bank loans out of necessity now face a difficult period coping with this debt overhang. They have to decide how quickly to cut deficits without undermining economic growth. Responses vary.
The US, with its preference for stimulus packages, remains concerned that drastic cuts to public spending could jeopardise the tentative global recovery and risk a renewed slowdown next year as tax cuts expire. Europe, however, is embracing austerity and committing to sharp reductions in Budget deficits. In part, these moves are necessary to assuage the fears of international bond markets. Controversially, even Germany is enacting austerity measures, although primarily to maintain its own position as a globally competitive exporter.
China’s move to de-peg its currency from the dollar may see it buy more goods from the West, Japan and other Asian countries. This should help to rebalance global growth.
Red tape and low growth at home has meant the best of Europe’s companies have had to look worldwide to grow their businesses. I remain positive about the outlook for the fund’s holdings. They operate in areas of secular growth, while their exposure to fast-growing economies around the world should help mitigate the impact of slower growth and sustain their profitability.
