A strategy that seems to have paid off, as it outperformed both the sector average and benchmark in one-, three- and five-year time periods.
Process
Mr Rosenfeld, who runs the fund with his team of Patricia Biggers, Alan Clifford and Steven Fockens, notes the investment process is “very much based upon the Lazard philosophy of relative value investing, which looks at the trade-off between valuation and financial productivity”.
He explains: “What we mean by this is that we look for quality companies with high or improving returns on capital and high barriers to entry that are attractively priced. We believe this enables us to generate consistent results, protecting capital in down markets and participating in market rallies, such as we have seen in the past year.”
In spite of market volatility in the past few years, the manager says the team have not altered the investment process, which has remained consistent since launch.
Macroeconomic issues are taken into account by the team, although the manager stresses they “do not allow such matters to dictate where we allocate capital”.
“We are company focused and rely on our stockpicking acumen to find financially productive businesses with high barriers to entry; we do not take large sector bets on the back of newsworthy policy announcements or data points, be they positive or negative,” he adds.
Performance
Consistent performance is the key to this fund and the figures certainly reflect that with the portfolio outperforming across one, three and five years against both the IMA European Smaller Companies sector average and the MSCI Europe Small Cap index.
For the five years to February 13 2014, the fund produced a return of 164.89 per cent, moving past the sector average of 143.54 per cent and just moving ahead of the index return of 164.14 per cent, according to data from FE Analytics.
Mr Rosenfeld notes: “Turnover is lower than the industry average, so changes to the portfolio are few. We sell companies either when they are fully valued or when our investment thesis does not play out. Turnover is low, as our investment style is designed for the long term, allowing a company to compound on its competitive position and productively use the cashflow generated to either expand the business or return money to shareholders.”
Performance in 2013 was boosted by its holding of Azimut, an Italian asset manager, as net inflows remained strong throughout the year and received a number of earnings upgrades. “We do not believe the investment thesis has entirely played out, so we remain investors in the stock.”
Another positive contributor included the UK stock Greencore, which manufactures and distributes a wide range of prepared foods to the consumer sector and primary foods to industrial sectors. Mr Rosenfeld notes the company announced strong annual results in September 2013 in spite of challenging conditions in the UK grocery market.
On the flipside, however, a detractor from relative performance was not holding a position in Alcatel-Lucent. The manager explains: “[It] was something of an anomaly. Alcatel has traditionally been a large-cap stock, but for a relatively brief period, the company’s shares plummeted to the point of being included in the MSCI Small Cap Europe index. When the stock rose again it impacted relative performance.”
Looking ahead, like many European managers, Mr Rosenfeld is looking for earnings growth to start to come through in 2014. “Small-cap stocks are highly sensitive to earnings growth, and cannot rely entirely on whole sectors re-rating,” he warns.
“However, in spite of the recent market falls, we still feel there is long-term support for small-cap equities. For example, M&A activity is picking up, which is always good news for small-cap companies targeted by larger businesses and can help lift the entire sector.”
Expert View
Darius McDermott, managing director, Chelsea Financial Services:
“This fund differs in that it invests in UK as well as continental European companies and it actually has a substantial weighting to the UK of almost 40 per cent. Germany is the next largest region at 15 per cent. This probably explains why the fund has been less volatile in general than its peers.”
