EuropeanAug 11 2014

Fund Review: Schroder European Alpha Income

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A focus on positioning the portfolio to benefit from the different stages of the business cycle, combined with a relatively concentrated portfolio, has helped the £326.7m Schroder European Alpha Income fund to outperform both its IMA peer group and benchmark in the past year.

Manager James Sym explains that the portfolio, originally launched in May 2012 as the Cazenove European Income fund, was designed to expose investors to a European recovery.

“It was the moment when it looked like the euro might not survive so things were very dark from an investment perspective in Europe. But the market had tried to anticipate these things and had fallen a long way, so I felt it had created some fantastic opportunities in perfectly good businesses that were very heavily discounted. So it seemed a good moment to expose clients to a European recovery, as you could make a lot of money.”

The aim of the fund is to outperform by 2 per cent on a rolling three-year view, and to generate at least 110 per cent of the benchmark yield, which currently puts the yield on the fund at roughly 3.4-3.5 per cent. The fund’s key investor information document gives it a risk-reward level of six, while ongoing charges are recorded at 1.7 per cent.

Adopting a time frame of three to five years is the most appropriate approach for Europe, according to Mr Sym.

“Firstly it gets you past the next quarter’s results and worrying what that might be, but it’s not so far in the future that no one knows what is going to happen. Secondly, there is always something to worry about in Europe, but there are also great companies. The risk is that if you worry too much about the short term you never make the investment in the companies that you think will double – or more – on a three-year view.”

When it comes to the business cycle approach, he points out there is no style bias. He is trying to position the portfolio correctly for any stage in the market. “I’ll get it right and I’ll get it wrong but that’s because I’ve got the wrong skew to the portfolio, it’s not because I’ve got a particular style that’s out of favour, as I have the flexibility to move around.”

Within that business cycle approach, the manager aims to find 40 stocks that are the “best money-making opportunities”. Selection is helped by regular company visits across Europe and the help of a network of local brokers who “know much more about what is going on in their particular market”.

Since launch to July 29 2014 the fund has delivered an impressive 68.08 per cent, according to FE Analytics, outperforming the IMA Europe excluding UK sector average of 40.93 per cent, and the FTSE World Europe ex UK index return of 45.06 per cent. Although still shy of a three-year track record, the one-year performance is equally strong with a return of 18.03 per cent against the sector average of 5.74 per cent.

“We launched specifically to benefit from a European recovery and obviously that has come through to a degree,” notes Mr Sym. “The question is, how much of the recovery is priced in? If it’s not all priced in, where do we want to be to make the best money from now on?”

Although the crisis discount has closed, he adds – as no one thinks the euro will break up any time soon – the market hasn’t yet factored in a recovery in earnings. Profitability in Europe is 30 per cent below previous peak levels, yet it trades at a lower multiple than the US, where profitability is at 20 per cent above its previous peak levels.

“If I’m thinking how best to benefit from earnings moving back to previous peak levels, those [companies] are the ones whose earnings are most depressed, as long as valuations are not overly high. So, things like financials and industrial cyclicals. That is the main thrust, but there are some interesting growth stocks that have underperformed since the rally of 2012. That has been the main change in the past six months: we have added a bit more growth. It is very much a portfolio that exposes investors to a normalisation of Europe.”

Expert view

Ben Willis, investment manager and head of research, Whitechurch Securities

Verdict

With an ex-Cazenove fund, James Sym adheres to the business cycle approach that underpinned many Cazenove funds. Although it has been open for only a couple of years, he has produced exemplary returns, successfully applying the business cycle to the sector through focusing on yielding, domestic-facing companies in unloved areas such as Italy and Spain. Such is the potential that Schroders sees in Sym, he has been made manager of Schroder European Alpha Plus.