A team of seven analysts manage the 60-stock portfolio on a 'best ideas' basis
As MFS Europe prepares to launch onshore portfolios, its offshore European fund is coming up to a three-year track record in March.
The fund is a collection of 'best ideas' put forward by a team of seven London-based analysts, who split the pan-European universe up by sector.
Within each analyst's sector they may sell a stock if, for example, it has met its price target or the fundamentals change.
However, if they want to buy a stock or add to an existing holding they must either sell something else within the sector or persuade the group as a whole that the opportunity justifies allocating more money.
There is no rigid research model for stock selections; analysts have the freedom to look at their own sector as they choose. But to present to the group in this way analysts are required to provide detailed earnings analysis and a summary of the investment case, which is then subjected to rigorous scrutiny.
Each analyst covers two or three industries and concentrates on understanding the companies within these on a purely bottom-up basis.
Barnaby Wiener, who covers pharmaceuticals for the fund, said: 'For a lot of fund managers, the investment process involves making calls on the macro-economic environment. We think it is very difficult to add value by doing that. Although we do consider the macro backdrop if our bottom-up indication is to go overweight a sector, we generally focus on the stock idea. As analysts, 95% of our time is spent researching companies.' The portfolio, which comprises some $180m, is made up of around 60 stocks. Because of the nature of the portfolio it is not highly correlated to the index in terms of its holdings.
Only around one third of the companies in the Euro Stoxx would be held in the portfolio,
Wiener said. 'Clearly, we have to think carefully about not owning a large index name, because if you get that call wrong you can suffer. But we are decisive about our convictions and if a stock does not meet our criteria, or if there is a better opportunity elsewhere, we will not hold it.'
On this basis the fund has not holdings in Nokia, Glaxo or Royal Dutch & Shell.
The biggest theme that has emerged from the bottom-up research over the past year was a heavy underweighting in tech.
Wiener said: 'As at the end of July we were around 2% underweight; however we were substantially more underweight in the middle of last year. We had no telecoms equipment companies at all, which were at the time a big part of the index.'
Although the fund's overall orientation is still fairly defensive, the biggest overweighting is healthcare, with an emphasis on medical devices and services. One of the main reasons for this is that earnings visibility is relatively good in this area.
There is also an overweight in media.
'This area is cyclical and these stocks have been beaten up pretty badly. We think that, when the market begins to recover, these stocks should be leveraged recovery plays,' Weiner said.
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