Quality growth stocks set for rally – Hermes

Hermes’ Tim Crockford has claimed the value- and recovery-driven rally in European equities may be fading and that ‘quality’ growth stocks should come back into favour.

Mr Crockford, who is co-manager on the £178.2m Hermes Sourcecap Europe ex-UK fund with James Rutherford, said his fund underperformed in the past year because he was “swimming against the current” by not buying deep-value stocks.

But he said that the types of rally seen in beaten-up European stocks “tend to be short-lived” and that the focus will switch back to focusing on company earnings growth.

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He said: “The value in European equities is in quality growth companies that have been shunned as people look for deep-value bargain basement stocks.”

Due to the underperformance of so-called quality growth stocks, which are often multinational firms with very recognisable brands, Mr Crockford said he is looking to increase his positions in some of these stocks.

However, he said the underperformance had come after a period during the eurozone crisis in which quality multinational firms were pushed up to huge valuations because they were seen as a defensive play.

But he said that, while some stocks still look expensive in spite of recent underperformance, there are now pockets of value that he is looking to take advantage of.

Although the fund managers refused to make tactical bets on value- or recovery-style stocks, Mr Crockford said they had added six names to the portfolio since the start of the year that are exposed to the cyclical economic recovery in Europe.

Mr Crockford said they waited to ensure that the recovery was sustainable and to take the time to find companies that had the underlying ability to grow even when the re-rating rally in Europe fizzles out.

One stock Mr Crockford has bought into recently is car giant Renault, which he said was “finally” reaping the benefit from its tie-up with Nissan in 1999.

As well as its growing emerging market business and its cost-cutting programme, Mr Crockford said the stock is set to benefit from the recovery in Europe.

The managers have also made their first foray into peripheral banks by buying Italian firm UniCredit.

He said the end of 2013 had seen a “stabilisation” of UniCredit’s core business and significant scope for positive change, leading the managers to buy in at the start of 2014.