The GAM European Growth fund has been winding down its major themes of telecoms and banking and rein...
The GAM European Growth fund has been winding down its major themes of telecoms and banking and reinvesting the money in unfavoured value sectors. The significant reduction in technology at the start of the year was timely and cushioned the fund from the correction in the market.
GAM European Growth is ranked third of 13 funds over three months, bid to bid, in the Europe, including UK sector. On a bid to offer basis, the fund is ranked fifth of 11 over one year and third of six funds over three years.
John Bennett manages a total of $230 million in a range of authorised and offshore funds and institutional mandates, including the £9m UK sub fund of GAM's Oeic. He talks to Jenne Mannion on the direction the fund is taking.
How do you invest GAM European Growth?
The fund blends industry themes and stock, with a strong emphasis on identifying themes.
We are benchmarked against the MSCI Europe (including UK) index. I am a passionate disbeliever in indexation, but I am acutely aware of the composition of the index. That is because if one objective is to beat the index I want to know what that index has in its armoury. If I know what it has, I know what I'm up against.
In the main, when looking for themes in Europe, I study what is happening or has happened in the US. This was most obvious a few years ago when I took heavy positions in banks and telecoms. Recently we have reduced our commitment to those sectors, following their substantial re-ratings.
Why were telecoms and banking so important?
Around four years ago, European banks were very country specific, but based on what was happening in the US, I realised they would have to become pan-European at the very least, or even global.
European banks weren't creating sufficient shareholder value and we thought they would have to rethink their positions or face takeover.
The second thing that encouraged us to move overweight in banks was the deflationary period in the US, which we thought would also take root in Europe. Disinflation helps banks, whereas inflation is the enemy because it erodes the assets.
We moved overweight in banks four years ago in anticipation of these changes but we are now underweight. Banks are 11% of the index and we are currently 9%. Within that we own specialist banks which are more asset gatherers rather than a lending story.
The other example is telecoms. We again saw what was going on in the US a few years ago. Again the telecoms industry was country specific. Therefore, we had these big boring ex-monopolies in Europe which were back then valued as utilities, at about 5.5 times EBIDA. These companies wouldn't have represented decent value if we considered them to still be utilities, but at least parts of the businesses were high growth companies, which the market was not recognising.
Now we are underweight telecoms, which we started to do in February, after enormous share price gains. We are now at 13% and the market is at 17%.
Valuations are now stretched. Markets often over-extend the valuation and then make up the growth story to justify it.
Is there any other reasons for moving negative on telecoms?
My big concern with telecoms in Europe, particularly with the new entrants, is that competitive pressure is much more intense than it was even six months ago. Our fundamental fear for telecoms is that they are going to be traffic rich and profits poor. They will have to buy the volume and that will come through in margins. We are starting to see the first cracks in the telecoms market. Recently, Equant announced that last year its gross margin was 30% and this year it is 24%.
Additionally, we are uneasy at the cost of third generation telecom licences in Europe after the UK auction process. If network costs are included, this figure could be several times the 1999 operating cash flow of the entire industry sector.
What is your position on technology?
We didn't buy internet companies per se and we didn't buy many of the dot.coms. What we bought were enabling technologies. We bought a long list of them as many of them are midcaps and we took profits regularly as they doubled and doubled again because we wanted to control stock specific risk.
This was because we knew the party would end, we just didn't know when. Now, we have less than 4% in mid-cap technology situations and about 10% in large caps, and I'm glad we have got that down.
Are you playing any themes now?
If there is any theme it is we are back in the old economy. For example drug stocks represent 10% of the fund, we like certain financials and we still think there is a theme to be played in media, as well as selective tech stocks.
Insurance is a possible new theme based on attractive valuations and improving fundamentals, as opposed to some areas of technology, which have high prices and deteriorating fundamentals, particularly in telecoms. Industry transformations such as we have seen in banking and telecoms do not come along every year. We have had a rich harvest from themes in the last year and what I say within the team is let new themes come to us, you pay a very heavy price if you try to force the issue.
So where are you reinvesting the money?
Currently we have 10% cash, which is high for us and I want to invest that.
At the moment markets are coming down and we are going to get that opportunity to invest.
We have started putting money into the UK in particular, although are still underweight. This is due to attractive stock specific opportunities. At the start of this year we saw both private and institutional investors losing sight of fundamentals, dumping traditional stocks, many having been late to technology, media and telecommunications.
Look at the names that came out of the FTSE 100 Index. For example, AB Foods, Wolseley and Scottish and Newcastle. These were thrown down to distressed valu
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