The manager’s £2.5bn Fidelity European fund lagged behind rival funds last year as his defensive portfolio failed to fully capitalise on a mounting consensus that the worst of Europe’s economic woes were behind it.
For Mr Morse a ‘pullback’ in the region’s market rises would help to vindicate his stance, but he also stressed that his fund investors were not unsatisfied.
“It’s ironic that I would describe 2013 as a nightmare year for me but our customers have been quite happy with the absolute returns during the year,” he said.
European shares rose by just under 23 per cent last year in sterling terms, according to data from FE Analytics, while Mr Morse’s fund gained 17.4 per cent.
The bottom-quartile performance compared to a stellar 2012, in which Mr Morse’s focus on income-generating stocks saw him outpace rivals.
“Part of the [2013] underperformance is related to the market environment where lots of companies I own have delivered what we would expect in total shareholder returns but they didn’t enjoy the sort of rerating other stocks did,” he said.
He cited French bank BNP Paribas as a stock he owned which had performed well, but not as strongly as banks such as Crédit Argricole or Commerzbank. He also named Swiss confectioner Nestlé, which performed well but not spectacularly.
Mr Morse said although not all the key indicators of the top of a market, such as a merger and acquisitions “frenzy”, had occurred, there were still reasons to be cautious.
“My personal view is that the market is ripe for a pullback on the grounds of external shock but the Continent is a bit better placed now than it was 18 months ago as we have made progress on the economic front.”
He added: “Exuberance is difficult to measure but markets were very strong in 2013 even though we did not really see earnings or dividend growth,” he said.
“We tend to look at those fundamentals and the stockmarket tends to look forward which means rising share prices might be an anticipation of growth and dividends but I am a bit concerned the market may have got ahead of itself.”
Mr Morse said analysts were forecasting earnings growth in Europe of 14 per cent even though there was none in 2013.
“Something else I have picked up on recently, which is a bit disturbing, is that I have looked at director selling and buying and selling picked up in December and January,” he said.
“They are not always right and not necessarily the best predictors of future earnings growth but lots of directors are saying people have become overoptimistic about earnings growth going forward so the shares look a bit high. So it looks like a good time to cash some of that in.”
The manager also highlighted a trend in investment trusts which pointed to the potential for the stockmarket to be at or near a high.
An investment trust’s shares often trade at a level lower than the net value of its assets, something which is known as the discount. This means investors often try to buy investment trusts at a discount because it means they are buying a group of assets at a reduced price.
But Mr Morse said discounts had narrowed significantly in recent months. “There are lots of structural arguments why discounts might be less but commentary I saw recently suggested when the average discount gets to 5 per cent, which is where we are now, in the past this has been close to the market top,” he said.
Mr Morse’s own investment trust – Fidelity European Values – was trading at a 10.4 per cent discount last week, according to data from the Association of Investment Companies.
The stocks which dented Sam Morse’s European fund in 2013
Fidelity’s Sam Morse said his investing style was part of the reason he lagged his peers in performance terms, but did acknowledge some stock-specific issues which impacted him.
The manager said he had reduced his position in oil services company Saipem ahead of 2013 but that the company in January reported a “major profit warning” and cut its dividend.
“I sold the stock but it had done quite a bit of damage to the portfolio,” he said.
He added Scandinavian-based stock Swedish Match had begun to lose some market share to competitors - although he saw this as a “temporary phenomenon” - which has prompted the shares to fall from $35 in January last year to $30 now.
The manager said a couple of other big tobacco companies had entered the Swedish market and “became more aggressive at the bottom end of the market”.
“This caused unfavourable dynamics in the market [for Swedish Match,” he added.
Mr Morse also said Umicore, a precious metals recycling company, was also hit because precious metal prices were weak. “In terms of relative performance we had three good years and then a difficult year in 2013, but I am sticking to my approach,” he said.
