Incisive Works recently attended an Allianz working lunch as Thorsten Winkelmann and Marcus Morris-Eyton discussed their portfolio construction philosophy for the Allianz Continental European Fund
Among the many pearls of wisdom attributed to Warren Buffett, "stop trying to predict the direction of the stock market, the economy or elections", may be the most ignored.
Yet the managers of Allianz Continental European Fund keep this philosophy very much at the heart of portfolio construction. All stocks are actively selected based on thorough analysis of company fundamentals, rather than a view on macropolitical or economic factors.
The seven-strong management team led by CIO, Thorsten Winkelmann, are expected to go beyond examining financial statements and balance sheets since, while helpful, these do not reveal what is going on beneath the bonnet.
The managers attend more than 750 company meetings each year to find the stocks that can deliver sustainable growth irrespective of the economic cycle. The investment process is designed to be consistent and has resulted in outperformance in 99% of rolling three-year periods across the franchise.1 Such is the success of the approach that three of the five funds the team manage are soft closed, leaving the Allianz Continental European Fund and Allianz International Equity Growth funds open to new assets.
The Continental European fund, which launched in 2010 and has €215m in assets under management,2 provides a strong example of the franchise's philosophy in action.
The fund has delivered 5.5% alpha per annum and in the year to date returned 17.6% to investors.2
Since inception the fund has returned 12.3%2 and has outperformed its benchmark over three, five and ten years.3
As with all the European growth funds the Allianz Continental European Fund is sector and geography agnostic. Managers are free to select companies of all market capitalisations across the broad universe of Europe-ex UK stocks. The only stipulation is that companies must be able to deliver consistent meaningful growth over the long term.
Making the case
It takes a considerable amount of time and research before portfolio managers are able to make the investment case for a stock.
It is not enough for a company to look good on paper, managers will explore every facet of the operation from senior to junior management, suppliers, customers and competitors.
As part of this investigative process, managers have access to the Allianz Global Investors Grassroots research network. This provides a unique insight via surveys and field research, for example providing feedback about a company's reputation in the market.
Managers gain an unequalled view across the company's potential pitfalls, where it will see most demand and where it has yet to make an impression.
There are several critical areas in which a company must prove its worth to be included the portfolio. First, the company should have a sustainable competitive advantage, which is protected from competition by various barriers to entry. This will enable a company to deliver structurally above average earnings and cash flow growth over a cycle. Then as long-term holders, the team wish to see a strong corporate culture, with a good management team who have a track record of delivering operational excellence. These companies are typically not cheap, but the value comes in the long-term compounding ability of their cash flows, which are usually underestimated by short-term investors.
These key characteristics signal the competitive advantages that companies need to deliver growth even in challenging market conditions.
For example, the Allianz Continental European Fund invests in a healthcare company that benefits from an ageing population ever more dependent on medicines and specialist services. Managers have identified a business with innovative health products that are difficult for competitors to replicate elsewhere. The company has unrivalled pricing power since customers need the product irrespective of economic conditions and their distribution across the domestic healthcare system is unmatched.
With an investment process built on sharing ideas, it is vital that the Continental European Fund's team collaborates freely. Every member from the most junior analyst up to the CIO, can challenge ideas, question strategies and bring their own perspective to the table.
Winkelmann encourages the team to pursue their own instincts, while feeding back constantly to keep colleagues informed.
This team dynamic is what keeps ideas flowing freely and allows individuals to take ownership of their place within the fund.
No one can ever say with certainty how the macropolitical or economic environments will develop. The current landscape in Europe is particularly challenging to forecast, and the future for the US is equally unpredictable.
Such an environment plays perfectly to the Allianz Continental European Fund's bottom-up stock picking approach. Managers will never be swayed by election results, or influenced by central bank policy, rather they find the best investment opportunities that will deliver long-term growth.
For a stock to be included in the Allianz Continental European Fund it must demonstrate:
- Secular growth
- A superior business model
- Technological leadership
- Barriers to entry
Source: 1 AllianzGI as at 31.03.2019. 2 Pico, IDS GmbH, 30.04.2019. IDS is a 100% subsidiary of Allianz SE. Past performance is no reliable indicator of future performance. 3 S&P Europe Ex-UK Large MidCap Growth net total return in GBP; MSCI Europe Ex UK Total Return (Net) in GBP.
For professional investors only. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Allianz Continental European Fund is a sub-fund of Allianz UK & European Investment Funds, an open-ended investment company with variable capital with limited liability organised under the laws of England and Wales. The value of the units/shares which belong to the Unit/Share Classes of the Sub-Fund that are denominated in the base currency may be subject to an increased volatility. The volatility of other Unit/Share Classes may be different and possibly higher. Past performance is not a reliable indicator of future results. Investment funds may not be available for sale in all jurisdictions or to certain categories of investors. For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports, contact the issuer at the address indicated below or www.allianzgi-regulatory.eu. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. This communication has not been prepared in accordance with legal requirements designed to ensure the impartiality of investment (strategy) recommendations and is not subject to any prohibition on dealing before publication of such recommendations.