‘Frustrating’ period in Europe for Lagrange

GLG’s Pierre Lagrange has experienced a “frustrating period” in Europe as companies which have missed their earnings expectations have rallied.

Mr Lagrange, who runs the $1.3bn (£800m) European Equity Alternative fund, said two thirds of companies had reported their results on the continent with earnings growth flat as it had been for the past two years.

But he said future estimates had been raised so earnings growth expectations were 10 per cent plus for the next three years meaning “a big re-rating of equities has occurred in the hope of future growth”.

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“The earnings and sales surprise data in aggregate have also been flat, and what has been most confusing in Europe especially, has been a negative correlation between price action and earnings surprises, with misses especially outperforming and beats flat to underperforming,” Mr Lagrange said.

“This has been a frustrating period for our more fundamentally driven stockpickers, and even our short-term trading strategy was wrong footed, and given our market neutrality, explains the fund’s return for the month.”

The fund lost 1.6 per cent in October – during which the MSCI Europe index rose 3.8 per cent and the S&P 500 index rallied 4.5 per cent.

Mr Lagrange said technology, media and telecoms (TMT) stocks had “an especially difficult month” and accounted for “practically all of the fund’s losses”.

The manager said the team which selects the technology stocks saw its short positions, which benefit the fund if the share prices of companies fall, had worked but the stocks it was long on saw share price falls in spite of matching or beating their earnings expectations.

“One significant exception was Qlik Technologies, a ‘big data enterprise solution’ long position, which had poor results, fell 26 per cent and was the fund’s biggest loser in the month,” Mr Lagrange said.

The manager said the TMT team had now looked at all the results of the companies they hold and analysed how the share prices had moved and “adjusted positions accordingly”.

Elsewhere, Mr Lagrange said the utilities and pharmaceuticals strategies within the fund produced positive performance, as did consumer, financials and industrial stocks

The manager said the fund’s gross exposure to markets, achieved through the use of derivatives, was “lower but still relatively high” at 229 per cent.

Mr Lagrange said two new strategies within the fund had come out of the “incubator” stage and the fund now had a ‘UK Core’ set of stocks and exposure to companies focused on energy exploration and production.

He added the group had hired an experienced oil services specialist, Tiger Craft, to help with the energy stock selection.