Award-winning manager Cédric de Fonclare uses combination of stockpicking and macro view to drive performance in Europe ex UK sector
Jupiter’s Cédric de Fonclare has been running the European Specials Situations fund since July 2005, through the period of extreme market volatility between the 2006 bull market and the credit crunch.
During that time, he has managed to outperform his peers by combining a stockpicking approach with top-down analysis to identify market-leading companies.
De Fonclare recently won the OBSR Rising Talent award, presented to a manager who has established a position in the market and has the potential to achieve strong and consistent long-term returns.
His £466m vehicle is ranked sixth over five years in the IMA Europe ex UK sector, returning 40.8% compared to an average of 22.2%.
What is your investment process?
There are a number of parts to my investment strategy. I have a stockpicking approach, but it is also influenced by top-down considerations. If I were to weigh the influence of these factors, I would say stockpicking accounts for 70%. The top-down element helps me in two ways. It helps direct my search for new opportunities, and beyond that it tells me the upside potential of any stocks I might want in my fund. For example, I might want to boost cyclicals or defensives as a result of what the economy is doing. It is a flexible approach that allows me to play volatile trade conditions.
I have been running this fund for five years and it has been a volatile time from the bull market of 2006 through to 2008. I have navigated this period with less pain than some of my competitors.
What type of stocks do you pick for the fund?
The type of businesses I like are leaders in their market, companies which can demonstrate this leadership, giving them pricing power and economies of scale.
The financial character I look for in companies is their ability to generate above-average growth and demonstrate a positive return above the cost of capital. In the current situation, what is even more important is the strength of the balance sheet. If a company has strong cashflows, the management is able to push further to do things like acquisitions.
In the environment of 2010, I have to be slightly careful about sectors where political influence can have a negative effect – for example, in utilities, where returns can be negated by legislation. We have seen examples of this already this year such as in Germany with the nuclear fuel tax.
I have also been taking a cautious approach to the type of financials I have been putting in the fund. I only have the most established names and in general I have a significant underweight to the sector. Names in the fund include BNP Paribas and DnB Nor. I have tried to play it safe and be cautious about the sector.
How is your portfolio positioned and what is your view on southern Europe?
The majority of the portfolio is in core European countries. We have a big exposure to Switzerland and the strength of the Swiss franc has helped those holdings to outperform. In general, the fund has a strong exposure to the Swiss franc and Norwegian krone.
From a style point of view, I have been targeting more international business because of low growth. Even though some domestic companies have done well, I am concerned they could be a value trap, and also about political interference.
I would expect a phase where there is a rebalancing as people try to go against the trend of international earnings.
Although I hear a lot of investors are targeting international earnings in their portfolios, I think there is a bit more room to play in that scenario. What could hurt my portfolio is if there is rapid growth and some relief on southern Europe. But I think growth will be slower.
I will invest in some companies in southern Europe if they are unique and can cope with the political risk. I have a Portuguese company call Galpe, which is an oil resources business, but I do not have much exposure to these countries.
In time, I think there will be more and more polarisation between winners and losers, between southern Europe and the core countries.
During the sovereign debt crisis, shares across Europe suffered large declines. Do you think investors are now starting to differentiate between countries?
If you think about international investors looking at Europe, they never understood Europe. They saw it as one region, but you have countries that have completely different economic cycles and this distinction is not really appreciated.
Internally, European investors have been pretty aggressive in reducing their equity exposure. Partly, it is a function of 2008 not being too far away in people’s memories. Even during the summer when there was negative macroeconomic data, the market went down.
What has been the impact of the weaker euro?
For years, companies have had to learn to deal with an overvalued euro and the way they have coped with this is by developing a much more global footprint.
Today, the weak euro has proved to be a boost to operating profit and we have seen this in the GDP growth figures which have been better in Europe than the US. A weaker euro is part of the solution, but to get out of its problems, Europe needs the emerging markets to play their role to compensate for weaker growth.
What do you think the outlook is for the rest of 2010?
Equity markets are trading in a range at the moment. Companies are reporting good numbers, but they are worried about the outlook. We have seen more M&A, but from a low base.
I think investors generally are light on equity and sentiment has been negative, and as a result we will have some more volatility. But I will look to take on more risk at the end of the year as fears of a double-dip grow.
I think politicians will do their best to prevent a double-dip. We have seen policymakers’ willingness to take action already.
Throughout this crisis, the ECB has been much more reactive than in the past. It kept interest rates lower for longer and changed its view about buying back bonds from financial institutions.
I think there will be a concerted effort to prevent a double-dip.
