By Robert Stock European manufacturing has become an identifiable theme in the smaller companies ma...
By Robert Stock
European manufacturing has become an identifiable theme in the smaller companies market, according to Marco Ricci, manager of Deutsche Asset Management's £96.4m Europa Fund.
This is being played in niche manufacturing industries, in which European innovation and technology are aiding their ability to compete.
It is, however, only one of many themes in a very broad-based European small cap market in which no one sector is significantly driving performance, making stockpicking the only way to outperform, he said.
Volatility remains high and Ricci, who typically runs a portfolio of 70 stocks, believes that a high cash position provides some cushion. He is running a daily position of between 6-9% depending on cash flows into the fund.
Ricci, who works as one of a team of three small cap managers and who receives input from the rest of the 25-strong Deutsche European fund management team, said sector and geographic weightings are driven by stock-picking, though stock selection is informed by macro-economic views from Deutsche economists.
Currently his holdings aggregate into overweight positions in Germany, France, Holland, Italy and Switzerland with corresponding underweights in Greece, Turkey, Belgium, Finland, Austria, Norway, Denmark and Eire, in comparison to the HSBC European Small Cap Index.
Fund performance is driven by overweight positions in software companies, business services, electronics manufacture, and telecommunications including equipment, services, and even repair companies.
Ricci is underweight in low-growth areas like property, materials, and banking, with the exception of certain financial services companies.
His investible universe consists of over 6,500 stocks in the bottom 25% of the European market by market capitalisation which corresponds to a market cap of less than E4.5bn.
Around 15% of the fund is in large caps, as Ricci can hold stocks for any duration regardless of growth in market capitalisation and the fund is consequently included in Standard & Poor's Europe excluding-UK sector. The fund is ranked first out of 101 funds over the 12 months to 11 October with offer to bid returns of 65.3%, closer to the 63% average in the European Small Companies sector than the 19.1% average of the larger cap funds.
Over three years it is ranked four out of 92 funds with returns of 91.4%.
Despite the overweights in new economy style sectors, Ricci said the fund is not a new economy fund and he will buy stocks in all sectors, a fact reflected in his largest holding, Red Electrica d'Espana, which has embedded value though a start-up telecommunications business.
He said: "At the moment I cannot see a sector where the stocks are going to perform simply because of the sector that they are in.
"No one can say that technology is coming back across the board."
Ricci said the portfolio also had neutral exposure to the euro as much of the fund consists of either exporters or companies supplying exporters.
Consequently, the weak euro helps exports and any turnaround in the euro's fortunes will be seen on profits and earnings growth.
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