Legg Mason’s Paul Ehrlichman has said he is targeting the sectors and regions that are causing the greatest investor unrest, with Europe presently top of his hit-list.
The manager of the diminutive £29m Legg Mason Global Equity Income fund is significantly overweight Europe (ex-UK), with some 40 per cent of his portfolio – against a benchmark weighting of 18 per cent – spread across the region.
The UK represents his second biggest regional allocation but accounts for just 14 per cent in comparison, while a mere 10 per cent is invested in the US.
The fund has punched above its weight in performance terms of late, delivering a 16 per cent return versus an IMA Global Equity Income sector average of 8 per cent in the past 12 months.
In the past three years it has achieved 37 per cent, outperforming the peer group mean by 8 percentage points, according to data from FE Analytics.
“Where there is the greatest amount of uncertainty is where we tend to be moving towards,” he said.
“We buy cyclically stressed assets but we buy the highest quality.”
While Europe’s economy only managed to muster a feeble 0.2 per cent growth in the first three months of the year, Mr Ehrlichman believes the subsequent negativity has been overdone.
“In Europe, we believe a strong possibility exists for earnings to improve given the stability that has developed as the region climbed out of recession in 2013,” he said.
“The last quarter was about consolidation and correction, and we still believe there is way too much pessimism in terms of growth in the coming years.”
Mr Ehrlichman cites automobiles and construction as two such embattled sectors that have caught his attention, with German auto firm Daimler, “the poor sister to BMW”, an example of the former.
“While we hold Daimler, we have cut back slightly as its valuation has risen,” he explained.
“BMW and Audi are still far more expensive and Daimler has been the laggard, but it has a strong domestic demand and it has improved its market share.”
Elsewhere, the manager is finding opportunities in the real estate arena and construction universe in southern Europe.
“We hold some Spanish real estate investment trust (Reits) including Lar España and Hispania Activos Inmobiliarios. The latter, for example, invests in cash-flow generating assets primarily in residential properties, offices and hotels.
“These are excellently managed businesses.”
Mr Ehrlichman also holds Dutch group Wereldhave, which focuses on shopping centres in north-west Europe and offices in Paris.
In terms of searching for firms demonstrating the ability to grow their dividends, Mr Ehrlichman highlights the energy sector, where, for example, he counts European giant GDF Suez is among his top holdings.
“These firms have slashed their capital expenditure and as a result now have a lot more free cash flow,” he added.
But beyond this, he believes Japan represents a big opportunity. “Japan has the best dividend growth in the world right now,” he said. “We had been underweight until very recently, but are now neutral. We can really see Japan improving from the dividend point of view.”
