Are European woes bringing investment opportunity?

The managers say that current market conditions are perfect for small-cap stocks, as the added value you get from small caps is often overlooked by the market and you can “get very nice share price performance, a rerating affect”.

The managers remain bearish on domestic-facing consumer and retail stocks. “Overall we believe there’s a large overhang of debt. It’s going to be a strong grind out for companies that are exposed to consumer demand,” says Mr Cross. However, even in the case of consumer-facing stocks, the managers say investments with unique businesses and commercial positions should do well.

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Charles Payne, investment director at Fidelity, agrees that this is the way special situation fund managers should look at current market conditions. “A true special situations investor will look for stocks which have unique characteristics and issues which set them apart not just from other sectors, but also similar stocks in the same sector.

“At a more macro level, a special situations investor will tend to be drawn more to those areas of the markets which are underowned by institutional investors in general and which are relatively cheap compared to their own long-term valuation history.”

Although a resolution to Europe’s problems is still forthcoming, Richard Pease, manager of the Henderson European Special Situations fund, claims there have been some positive signs from the market. He says: “The market has taken comfort from the European Central Bank’s (ECB) decision to cut rates and to provide liquidity support to banks via a long-term refinancing operation, which was taken up enthusiastically. Elsewhere, the Chinese authorities are attempting ensure a soft economic landing with an easing of banks’ reserve requirements.”

The manager is hopeful that, in spite of the depressed levels of growth and a lack of stability in the eurozone, his portfolio “has the potential to perform strongly if the uncertainties surrounding the currency environment are addressed”.

Mr Cross adds: “We’re hearing from our companies that certain parts of the world growth remains positive and there’s still a certain pull-through in demand. Specialist exporting areas will do well.”

However, he argues that fund performance will boil down to an individual fund manager’s investment style.

“Not all managers have the same style, some go for value and some go for growth and that makes it difficult to compare funds. Some will do better than others,” he says.