Growth stocks in Europe are "overpriced", according to Aubrey Capital Management's Sharon Bentley-Hamyln, who said she has had to go "off-piste" when picking stocks for her European Conviction portfolio.
The fund manager and company director, who co-founded Aubrey alongside Andrew Dalrymple in 2006, adopts a strict initial quant screen that she refers to as the "three 15" model; all holdings in the fund must be able to produce a 15% return on equity, a 15% cashflow return on assets and an earnings-per-share growth of 15% per annum.
She will also pay no more than 1.5x price-to-earnings for any holding.
"This screen alone shrinks the universe enormously in terms of what we can and cannot invest in," Bentley-Hamyln said.
"In Europe, growth stocks are overpriced and it is difficult within the index of European stocks to find companies that meet our valuation limit."
While the manager adopts a bottom-up stock selection process, there are entire market areas she tends to avoid such as utilities, big pharma, oil & gas and banks.
"When you are looking for such high-growth companies it does skew you in certain sectors," she explained.
"Technology and software, and consumer growth themes, account for 25% of the portfolio. Industrial innovation is another third of the fund, and there are slightly smaller weightings to real estate and financial services - although these are very much specialist financial services."
The fund has a highly concentrated portfolio of 35 stocks and an active share of more than 95%. It has therefore "never even looked remotely similar" to its MSCI AC Europe benchmark, according to Bentley-Hamlyn.
The process has stood the €27.6m fund in good stead. According to data from FE fundinfo, it has comfortably tripled its average peer in the FO Equity Europe inc UK sector and more than doubled the returns of the index since its launch in March 2019 with a total return of 20.2%.
This puts it in third place for its performance out of 233 funds.
"We have always felt it is our job to really look into those undiscovered, under-researched stocks. That is where we get our edge and our outperformance," the manager said.
One example from the portfolio is Barco, which builds visualisation systems, security screens and digital projections for airports, control rooms and even endoscopies.
Bentley-Hamlyn believes one of the reasons it is overlooked is that it is listed in Belgium, as opposed to one of the larger European countries.
Another favoured holding is ASML in the Netherlands, which is one of the leading producers of lithography machines.
When it comes to the UK portion of the portfolio though - which accounts for approximately 22% of the fund - Bentley-Hamyln said the best opportunities lie in infrastructure.
"We bought a holding in MJ Gleeson earlier this year, which is a provider of affordable housing in the midlands and the north of England - the areas that lent their vote to Boris Johnson during the last General Election," the manager explained.
"There is a huge underinvestment in affordable housing and we think that is likely to change."
Overall though, stocks are chosen on a case-by-case basis.
"We are not afraid to make big sector bets if we are simply finding lots of individual opportunities in that area," said Bentley-Hamlyn.
"It is an intuitive thing. Are these teams running a tight ship? Do they engage their employees? We like ‘can-do' businesses that are entrepreneurial and really going places."