After spending much of last year discussing UK and US politics and markets, it definitely seems to be Europe’s turn in 2017.
This is hardly surprising. Europe’s far-right populist politicians keep gaining ground, even if they don’t manage outright wins. Anti-EU noises are not going away, and with this comes concerns over the trade bloc’s future.
Other less-hypothetical (and perhaps less headline-grabbing) indicators, however, look more promising. Corporate earnings outlooks are up on the latest inflation figures, which may hopefully allow Europe’s companies to finally implement some much-needed price increases after years of deflation. Economic growth is better than it’s been in a while, and fund managers, company executives and even European Central Bank board members are starting to whisper that elusive word: recovery.
US and UK equities are trading up around record highs, yet European stocks still look cheap. In this context, I believe retail investors may be looking for a way to gain access to this potential. One way is to find a fund manager who ignores European politics and macroeconomics almost completely in order to focus on company fundamentals. Ken Nicholson at Mirabaud fits the bill.
His Mirabaud Equities Europe ex UK Small and Mid fund launched just under a year and a half ago in November 2015, but Mr Nicholson ran a very similar strategy for seven years: SLIs’ European Smaller Companies. He and his team have a road trip programme that makes Jack Kerouac look lazy, and the number of companies they meet each year is one of the keys to their success.
Out of these companies, Mr Nicholson will choose 30 to 40, thus the portfolio is concentrated and has a high active share. Its performance won’t always correlate with the index and can take time for others to discover the potential of his picks.
This manifests in somewhat irregular alpha on a discrete calendar year basis. But as a long-term holder of the fund throughout Mr Nicholson’s tenure, you would have come out well ahead of the index.
Another thing I particularly like about his approach is that he pays a lot of attention to downside risk. The fund has delivered some of its strongest outperformance in falling markets. A 20 per cent stop-loss review process has helped him to achieve this, as has a focus on stock liquidity among his smaller company picks, so that he can sell out of a stock if he needs to in a highly volatile market.
The portfolio has country and sector constraints of plus or minus 20 per cent relative to the index and its current positioning is diverse, despite its concentration. Also, Mr Nicholson doesn’t like shares with what he considers “binary outcomes”, a category in which he places most biotech, mining and oil and gas stocks. Conversely, he is finding good opportunities in industrials and consumer staples, which together make up just over 45 per cent of the portfolio.