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Fund Review: Schroder European fund

For the first time since taking over management of the £326.3m Schroder European fund in May 2006, manager Martin Skanberg has moved away from growth and quality stocks, and into more value-driven companies.

This, he says, is because growth stocks, based on relative performance when compared with value stocks, have peaked and no longer offer significant upside.

“The way we approach stockpicking is really to look for the mispriced opportunities at a stock level. We have been very underweight the ‘value’ segments of the market for many years and that value underweight has now been reduced because we have taken the ‘growth’ exposure down. We don’t make macro tactical calls, but we are looking at the relative performance between growth and value stocks and that peaked earlier this year,” he says. “We have started to reflect that move in the fund by buying stocks in Italy, Portugal and Spain which are really offering those mispriced opportunities right now.”

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The fund is run on a high-conviction basis and typically holds between 55 and 60 stocks, the core of which tends to be large-cap companies.

Process

Mr Skanberg’s investment process starts with stock valuation, but instead of following the traditional approach of looking at the implied market value of a business, he looks at the business model first and asks what the market valuation is.

“From finding a good business model opportunity, we want to tease out the expectations for the company – sales growth, operating margins and balance sheet returns. If we take a different view than what is implied by the market valuation, we get excited,” he explains.

The manager cites GEA Group, a company that has been held in the fund since early 2009, as a stock that demonstrates the investment process perfectly. “This is a German company that makes all the equipment for the food and dairy industry – keeping, cooling, drying – everything you need to pasteurise milk, make freeze-dried coffee, package meat,” Mr Skanberg explains.

“The reason why we bought this in early 2009 was not because the market was on its knees or because industrials were out of fashion, it was because the implied market expectations for the company were too bearish.”

He claims that in early 2009, using the valuation metric of ‘enterprise value to sales’, the market had implied a 4 per cent operating margin for GEA Group. “At that time they already had a 4 per cent operating margin. The market had simply taken the current valuation at the time and extrapolated that, this is very common. We thought the stock could actually achieve 12 per cent because at the time there was a lot of headlines about milk scandals in China and it really hammered home the importance of having the best equipment available,” Mr Skanberg adds.

The manager, once the valuation screen has been completed, then looks for an ‘inflection point’ – a catalyst that clearly shows now as the best time to buy that company.