Partner Insight: Isaac Chebar, manager of the DNCA European Select Equity Fund, on how a contrarian view allows him to seek out undervalued equities in continental Europe.
What is the DNCA European Select Equity Fund designed to do?
Well the fund is designed to outperform the MSCI Europe ex-UK index over the recommended investment term. We make the case for unloved companies and how, in the medium to long-term, we can make money by going against the market. In this respect the fund is a contrarian vehicle.
What is your investment process?
We start by asking: ‘where are the low valuations?' Then we look at what the market is telling us about these low valuations and how we can interpret this differently. It may be the case that these low valuations give us an opportunity to invest. After this, we ask ourselves what the management has to offer. The fund takes a view of the company as a whole. ‘How much cash was generated over a period of seven to ten years?' We look at how the company is evolving in terms of margin, its cash flow and results.
What key risk parameters do you identify and how are you mitigating them?
There are two or three risk areas we focus on. The first is corporate governance, especially when you are dealing with companies with a big minority shareholder or controlled by private partners. We need to know a little bit about the history of the company. For example: how does the family or the minority shareholder behave in a downturn? The second is financial risk. The fund invests at least 80% of its assets in shares of European companies, including Switzerland, but excluding the UK. Financial leverage is an important risk as companies with low leverage might not be obliged to sell assets on downturn at rock bottom prices and sound balance sheets can profit from distressed situations.
The third is liquidity risk. A lot of liquidity in the market is trapped in exchange traded funds. And for the last 10 years the leading sector has been European small mid-caps. Money has been funnelled into that part of the market. So in terms of net flows, on the whole it has been positive just after the 2008 crisis until now. One never knows when a liquidity risk might emerge.
Click here to learn more about Isaac Chebar's process for picking quality value stocks in Europe.