Chris Garsten, Waverton Investment Management
What is your strategy?
An active all cap, style and benchmark agnostic, European equity fund. The investment objective is to generate capital growth by investing in a concentrated portfolio of equities selected through in-depth, bottom up research.
Why should fund selectors invest in your fund vs your peers?
This is one of the most consistent funds in the Europe ex-UK peer group. This can be measured on two levels. The first is consistency of management and approach, the fund has been run by the same team since inception in April 2001. The second consistency is the Fund’s performance; in the 17 full years it has existed the fund has outperformed the MSCI Europe-ex UK Index in 15 of them, including the last 11 in a row.
Why does your strategy stand out from your peer group?
Over and above its track record, one of the key differentiating features of this fund is the core philosophy of investing. Over the years this has led the team to uncovering some extraordinary stock opportunities. The team searches for “five key attributes” of a wealth creating company, which are as follows:
- Interests aligned – Management working for the benefit of all shareholders
- Earnings visibility – Predictable with a reasonable amount of confidence
- Pricing power – Sustainable competitive advantage
- Cash generative – Dividends, pay down debt, fund future growth, share buy backs
- Return on capital – High or rising
The requirement for company management to be working for the benefit of all shareholders is paramount. This alone materially differentiates the fund’s investable universe from much of the peer group who are far more focussed on top line growth.
How do you protect investments against market volatility?
This is a pure long only equity investment fund that does not employ the use of any derivative or hedging strategies. Historically the fund has displayed lower volatility than both the index and peer group. This can be attributed to the risk management disciplines which the managers employ at stock and portfolio level.
Managers can control company specific risk to some degree by being prudent with position sizing. They will typically make an initial investment of up to 3% in a large-cap company or 2% in a mid / small-cap company, depending on their conviction and the liquidity in the underlying holding. They can let this grow with performance and topping up positions but will be very unlikely to have any holdings larger than 6% of the portfolio.
Portfolio risk is primarily addressed using diversification at both country and sector level. There are no formal country diversification limits, and the country exposure is a function of bottom-up stock picking, but the managers will use a common-sense approach to make sure that there is not excessive exposure to any one country.
At sector level, the team have a soft limit of staying within 10% relative to all the major sectors in the index. This discipline acts as a pragmatic risk control but in the context of a 30-40 stock portfolio still does not overly constrain the fund to diversifying for the sake of it.
How does your fund prosper in a bear market?
During the last two major bear markets in continental Europe (2000-2003 and 2007-2009) the fund was able to outperform in the downturn and in the subsequent recovery. This can be attributed to the team’s risk management disciplines as well as their stock selection process. The team focusses on finding cash generative companies with earnings visibility and pricing power.
How does your fund outperform in a bull market?
The fund has proven to outperform across the cycle and in various market conditions over the last 17 years. One environment it tends to outperform in particularly is during periods when crowded trades which they have avoided turn sour. Conversely it will tend to underperform when a sector the team do not own because they cannot find stocks which are attractive for fundamental reasons temporarily outperforms the market. This will often be because the managers are avoiding a crowded trade which continues to perform well for an extended period.
The eurozone is slowing and the growth outlook is uncertain. Is it really a good time to invest in European equities?
Our focus remains on finding companies meeting our investment principles, principles that have seen our portfolio do well through the cycle in the past. We concur that there is plenty of evidence that the continent is currently seeing a loss of economic momentum. But there has been a shift in monetary policy guidance in the US and markets have taken some comfort from that. The ECB may also become more flexible on its planned withdrawal of QE. With sentiment toward Europe poor, and valuations reasonable, we think a lot of bad news Is already in the price.
Which fund managers in your area do you admire and why?
We respect many of the fund managers who have been investing in our sector as long as we have. Alexander Darwall started managing his Jupiter European Opportunities fund at a similar time to us and, although we have a very different style of management to his, we do admire that he has built a successful track record while investing in a totally different opportunity set in Europe.
What is your biggest fear at the moment?
At the moment our biggest worry is a major economic slowdown, possibly caused by issues such as trade tensions or the delayed effects of QE tapering. They are difficult to predict but we did see fears of it cause significant stock market weakness in the Q4 2018.
