Focusing on strong fundamentals
While concerns about global growth prospects remain, we have seen some movement towards consensus among European politicians around the type of measures required to ameliorate the sovereign debt crisis.
The recent announcement of further bond buying for troubled peripheral states by European Central Bank president Mario Draghi has contributed to this, as has the more conciliatory approach from the German government, even if Germany’s central bank remains sceptical of the scheme.
In this sort of uncertain environment, we are sticking to our investment approach of maintaining a core of quality growth businesses with sound finances, which can be adjusted to reflect changes in the economic cycle and in valuations, while also seeking out some cyclical elements. We try to be opportunistic, exploiting periods of volatility to gain exposure to the companies we like at good value.
In the last year, this focus on companies that benefit from strong fundamentals, structural growth and international reach has worked well for us. For example, Syngenta, a global leader in crop protection, has gained as high food prices have encouraged farmers to try and maximise crop yields from their land, using its cutting edge technology to do so. Healthcare conglomerate Fresenius has also added value thanks to various parts of its business, including the arm that produces specialist dialysis equipment. The increasing use of this technology for an aging population should continue to produce reliable earnings growth in the years to come.
On the flip side, we have been avoiding areas exposed to political and regulatory risk such as banks, utilities and telecoms. Over the long term, this strategy has generally contributed positively to performance. However, during periods of heightened volatility, many of the companies in these sectors have seen sharp relief rallies following more positive political statements or value seekers buying companies simply because they are cheap. From time to time, therefore, our holdings have lagged these sudden uplifts. Equally, however, we have been shielded when sentiment has turned on these stocks as fears about macroeconomic factors such as a potential break-up of the euro or slowing global growth have re-emerged.
We believe these types of stocks are being driven primarily by technical factors, not by fundamentals, and many are retrenching. For example, we have seen Telefónica suspend its dividend for two years on concerns about cash-flow and a desire to shore up its balance sheet. To do so, it plans to sell those trophy assets which have the most capacity to grow and instead focus on its home market Spain, where demand is weaker and therefore further diminution seems likely. Therefore, we think it wiser not to try and chase very short term movements in these areas.