Aberdeen's Champions fund focuses on stocks whose leverage will benefit from the expected economic recovery
Stephanie Gerrard has positioned the Aberdeen European Champions fund in stocks with strong operational leverage that are well-positioned to benefit from an upturn in economic activity.
Aberdeen launched its European Champions fund in April 2001 to showcase the stockpicking abilities of the team behind its European Growth fund.
With a focused portfolio of 50-60 stocks based on the best ideas of the European team, the fund is unconstrained by sector, country or market cap limitations and is the most aggressive of Aberdeen's European funds.
According to the group, the Champions fund has ranked in the top quartile since launch, outperforming the sector average by 3.7%. S&P recently gave the fund, which has £8m under management, a single-A rating.
How would you describe the investment style of the European Champions fund?
We wanted to take the best stock ideas from European Growth, lose the index ballast and just have a stock focus fund.
European Growth is roughly a £450m fund and, historically, had a lot of institutional ownership, which meant the tracking error has been pretty low at around 2.5% against the FT World Europe ex UK index. The fund aims for a tracking error of 3%-7%.
The stock commonality between the two portfolios is extremely high and the sector direction bets are the same. The only real difference is that the magnitude of individual stock positions is greater in Champions.
How does the stockpicking process work?
We have a top-down process, which involves clicking in with the strategy guys and talking to other in-house desks as well as strategists and economists from outside the group in order to find out where we are in the economic cycle. From that we tilt the sectors, with each of us on the desk covering different sectors. My focus is consumer goods and services and it is my job to come up with stock names from those sectors. We don't force stocks into that top-down process. If the stock-specific fundamentals don't justify a stock being in there, we won't own it.
What is your outlook on the equity market? Have we hit bottom?
Looking at valuations, economic data and earnings, in a normal cycle, equities at this level would certainly present a good buying opportunity.
What is different is the extent to which sentiment is driving this market, whether it be ongoing geopolitical risk that has raised the equity premium or the accounting issues that mean people are unwilling to believe anything corporates tell them, and the extent to which this all becomes self-fulfilling.
It's impossible to call on a one-month basis but we don't think the stocks we're in now will be lower in 12 months' time.
How have you positioned the fund for economic growth?
If we can see gentle appreciation in economic activity, then operational leverage will see earnings growth come through. The sectors we've looked for, such as support services and media, are the areas where operational leverage killed the stocks on the downside last year, which equally should benefit them on the upside this year.
We're not aggressively playing the consumer because we know it's pretty much as good as it gets.
Do you think mid-cap stocks are a better bet right now?
It hasn't been the desk view that mid-cap is the place to be, it's just that's where the stock ideas have come from. It's been very much a bottom-up method of idea generation.
A lot of the cyclical names fall into the mid-cap size, such as paper, aluminium and steel companies. The media and support service names we've liked have been mid-caps and we feel there is some real value there.
The big-cap names contain a lot of financials, some of which look interesting. Food stocks, which we feel are overvalued, and a lot of the consumer staple names are big caps, which we're not tempted by at the moment.
What is a stock pick that has worked particularly well for the fund?
JC Decaux is a good example. It had a disastrous IPO last year that we didn't get involved in because we felt the valuation was too high. Post 11 September, we came back to it because the analysts had gone pretty quiet on the stock and we noticed the price had halved.
We'd always quite liked the story and felt the management was interesting as well. Then we found analysts were comfortable with the fundamentals but weren't prepared to back it because it was a difficult IPO. We picked it up because we felt the valuation was very reasonable and that, increasingly, the fundamentals will begin to look better.
What limits do you have on stock holdings?
Champions doesn't have any real limits on sector or country because it has more emphasis on stockpicking and we didn't want to limit ourselves on that. But, in practice, the sector maximum has been 8% over benchmark.
That was in cyclical services, which is where media and support services sit, while the most overweight country is France, which is 26% against an index weighting of 21.5%. For stocks, our limit is plus or minus 5% to index weighting.
How do you manage risk other than through diversification?
We run spreadsheets weekly looking at stock, sector and country rates, both absolute and relative to index coverage. We have a performance risk committee, which has parameters for each fund and will indicate if we go outside any of those.
We also have style analysis that will flag if the fund has gone outside of the style of the rest of the European funds.
Do you use futures or options or hedge your currency exposure?
No, it's plain vanilla ' no derivatives and we don't use cash as an asset so we're pretty much fully invested at all times. There's no currency hedging.
How successful has the fund's cyclical positioning been?
In June, a mid-cap bias clearly did not help because those are names that had done very well and were vulnerable to profit-taking. And an underweight position in foods and beverages and tobacco, which we felt were at relative highs versus the market, have done well, which has hurt us.
We re-examine our view constantly to decide whether we're prepared to stick with it and, if we are, we'll take a month or two of volatility.
We've stuck with what the economic data and the earnings figures are telling us and, as long as that's on track, we'll stick with our view for mild recovery, which should be good for equities and the sort of sectors we're in.
What has been a bad pick and how do you deal with disappointing picks?
If the reason we bought the stock has fundamentally changed or we've seen a management change we haven't looked for, we get out. If our economic viewpoint changes and we're holding a stock that is a play on the specific economic scenario, then we change. One stock that hasn't worked for us is Bulgari, which looked like better value than other luxury goods stocks and had underperformed. It has continued to massively underperform the sector.
But given our view that we're going to see some sort of recovery, we feel luxury goods should be a good sector in the second half of the year and into 2003. We believe it's highly unlikely in that scenario that Bulgari will underperform the market.
Do you think funds need to seek more dividend-bearing stocks to lure investors right now?
It's got to come down to the view on the individual stock. We may or may not believe the dividends are going to be maintained. If we're purely going after yield, we may be taking on more risk than anticipated.
Everyone's talking about that but there is a danger. As soon as the market becomes convinced there is only one way of looking for value, there's a reasonable chance it'll be found by looking the other way.
Are you happy with the single-A rating S&P has given the fund?
With a new fund, it would be aggressive to hope for anything else. Champions has to prove itself. We're happy with the way it has performed over the past year and the way the team has adapted to a stockpicking scenario.
We're hopeful that if we continue to do it for another year or so we can get a higher rating.
What is the turnover on the fund?
We tend to have about 80% turnover. If we can add value by trading, we will, but at the moment we're not doing a huge amount because we feel valuations are wrong on our stocks. We'll stick with that view in the belief the market will come up to meet us.
We think equity markets are undervalued at the moment. We were too bullish earlier in the year because we didn't see how badly sentiment would pummel markets. We were right on the macroeconomics but wrong on sentiment.
FUND MANAGER: Stephanie Gerrard
Specialises in consumer goods and services and media sectors.
Joined Aberdeen 1997 as North American fund manager before moving to European desk in 1998.
Previously she was a manager of US portfolios at Lazard Bros.
Honours degree in history from Gonville and Caius College, Cambridge.
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