Gam’s Gallagher scales back on ‘popular’ stocks

Gam’s Gallagher scales back on ‘popular’ stocks

Gam European equity manager Niall Gallagher has grown cautious over some European favourites after continued interest from rival investors pushed up valuations.

The manager’s Gam Star Continental European Equity fund has split its 35 positions between domestic recovery plays, long-term growth holdings and “beaten-up” stocks, but is looking to scale back on some companies favoured by his peers.

A proportion of the ¤1.1bn (£860m) vehicle’s holdings are in companies that have been gaining traction with rival investors of late, causing Mr Gallagher some concern over valuations.

Article continues after advert

The manager recently began selling Irish stock Paddy Power, as he thought valuations were peaking as it merged with UK rival Betfair.

He also had worries about long-term holding Kingspan, but said the stock’s fundamentals remained strong.

Mr Gallagher said: “Kingspan is quite popular and has some large management groups that are big shareholders, which worries me a little bit. But we just make sure we focus on the fundamentals and the valuation.

“There are some companies where [crowded trades] have caused us to take action.

“A big holding was Paddy Power, which I held for more than a decade. Paddy Power and Betfair will be a phenomenal business, but my god is it priced that way.”

While equity managers seem to be backing similar stocks, underlying investors generally appear to be more bullish on Europe. Investment Association figures show European equity funds were the most popular among UK retail investors in January. The asset class saw £250m of net inflows in what was a dismal month for sales.

Mr Gallagher maintained overall valuations in the European market offered more value than those in rival markets such as the UK and the US.

He said low price-to-earnings ratios had led many to think there were structural issues with the space. But he insisted the asset class still looked cheap, even once “problematic areas” such as commodities, banking and heavy industry were stripped out.

Taking a look at revenues on a market-wide basis was misleading, the manager added, countering other commentators bemoaning the lack of earnings coming through from European corporates.

Mr Gallagher said: “In the market there are some companies that are growing and some that are shrinking, so if you’re only going to own 35 then you can focus on the ones that are growing. I tend not to worry too much about what the market is doing in terms of earnings.”

His colleague at Gam, investment director Charles Hepworth, remains heavily overweight European equities within his multi-manager range, in part through Mr Gallagher’s fund.

“Europe is recovering [and] we are seeing positive credit formation,” Mr Hepworth said.

“The weaker euro is helping stocks we are investing into – it is an area we are massively overweight. PMI [purchasing managers’ index] data is leading all other regions.”

But he remained slightly cautious on the actions of central banks, despite thinking global markets would “muddle through” in 2016.