EuropeanFeb 17 2014

Fund review: Gam Star Continental European Equity

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

This has helped the fund outperform the IMA Europe ex UK sector average and the benchmark MSCI Europe ex UK index in three, five and 10 years, with the manager noting investments are based on the bottom-up insights that result from the fundamental analysis and valuation.

PROCESS

Mr Gallagher explains: “We aim to build up a very detailed knowledge of companies based on proprietary research and to hold stocks for very long periods of time. Many of the holdings are idiosyncratic and we avoid thematic investing. We also avoid excess turnover from ‘sector rotation’. Our experience has been that investors who own companies for thematic or cyclical reasons often do so for the wrong reasons and often buy and sell at the wrong time.”

Having run the fund for almost five years, the manager notes the process has remained consistent, with little room for top-down inputs into the fund’s construction “other than to the extent that macroeconomic developments might influence expectations on the prospects for individual holdings”.

PERFORMANCE

The medium- and longer-term performance of the fund has been strong with a five-year return of 91.95 per cent compared with the sector average of 80.18 per cent and the MSCI Europe ex UK return of 72.41 per cent.

However, the shorter-term performance has lagged slightly with the 12-month return to February 5 2014 just 9.1 per cent behind the sector average of 12.9 per cent and the index return of 10.66 per cent. Mr Gallagher notes the overall outperformance of the fund has been generated “overwhelmingly by success at the individual stock level with little impact from factor risk elements”. In 2013, the manager sold a small number of long-standing positions where the valuations appeared to have become too stretched. He adds: “[this was because] other investors became excited by ‘quality growth’ stocks and placed too high a valuation on to such companies.”

The fund also initiated a new position in Adecco, where the valuation looked attractive and the company seems likely to benefit from improving underlying labour market conditions. In addition, the manager increased the fund’s exposure to the periphery through the additions of Pireaus Bank in Greece and BBVA and Banco Popular in Spain.

The manager adds: “The portfolio retains a high level of exposure to cyclical companies in both consumer and industrial areas as we believe the companies we own have good prospects at attractive valuations. Specifically, the fund retains a high exposure to the automotive sector.

“These companies will not only benefit from an economic recovery in Europe but also reap the rewards from continued globalisation and growth of the emerging market car fleet. Although these stocks have done well in the past 18 months, we believe they remain attractively valued with much upside to come in future years.”

In addition, he highlights the portfolio also retains a bias away from businesses that it perceives to be “structurally value destructive”. It therefore shies away from companies with high levels of operational and financial gearing where there are no signs of an ‘over the cycle’ improvement in return on capital employed.

With such a clear stockpicking process the boost to performance has come from a wide range of sectors with positive contributors including Paddy Power, Ryanair, Zurich Insurance Group, Henkel and Atlas Copco. On the flip side stocks such as Bank of Ireland, Saipem and Vallourec all dragged on the fund.

Looking ahead, however, the manager remains optimistic for the region on the basis that all of the gains in the past two years have been price rather than earnings led.

In spite of a long and distinguished track record, this fund seems to be somewhat overlooked by many no doubt in favour of some of the larger members of the peer group. Recent performance may have dragged, but it still remains in line with the benchmark index, so for investors looking for a smaller, fundamentals driven portfolio with a long track record, this may well be worth a second look.