Baillie Gifford’s Paice backs shunned European companies

Baillie Gifford manager Stephen Paice says the market’s negative perception of his favoured stocks has not prevented him from adding to such positions.

The co-manager of the Baillie Gifford European fund, a member of the Investment Adviser 100 Club of top-performing funds, said he had been buying into stocks such as Nestlé and Novo Nordisk after they were de-rated by the market.

Such firms are deemed less economically sensitive, meaning when risk appetite among investors picks up, these stocks are usually shunned for more risk-sensitive investments.

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The European fund, managed by Mr Paice with Thomas Coutts and Paul Faulkner, is in the top decile for performance in the IMA Europe sector in the past three and five years.

However, the fund has slipped into the third quartile in the past year, according to figures from FE Analytics.

Mr Paice said performance had suffered in the past year because the stocks the team invests in went out of favour.

“Until the start of 2013, the market was paying a premium for low volatility companies with big exposure to emerging markets, such as Nestlé,” he said.

“But throughout the year, the market psychology and sentiment changed and as the market was going up people took a punt on certain stocks, the sort of firms we may have looked at but thought weren’t quite right.”

The manager said that he would not adjust his fund’s positioning solely because the stocks he buys are out of favour.

He added that he considered each stock’s potential return over a five-to-10-year timeframe and so had been increasing his exposure to companies that had sold off.

“We think this sell-off is an opportunity to pick up these great companies with pricing power and low capital requirements that can grow quite cheaply,” he said.

“It’s a good time to be investing in our type of stock.”

He said he had particularly been adding to Novo Nordisk, the Danish pharmaceutical company, which had been hit by some pricing pressure and a product delay in the US.

The problems, along with the general de-rating of such stocks, led to Novo Nordisk’s price-to-earnings ratio dropping from 28x to 17x, in spite of its rising earnings growth.

Mr Paice said he had added to his holding in the company then because “relative to history, the sector and the market, we thought it was a pretty attractive proposition”.

However, the management team has also backed some slightly different, less established companies with more of a “turnaround” story, such as Volvo.