By Leo Bland M&G's European growth fund has moved underweight financials due to the perceived incre...
By Leo Bland
M&G's European growth fund has moved underweight financials due to the perceived increase in competition from the internet. At the same time the 54 stock portfolio has moved overweight media.
M&G European, which is managed by Susan Smith, looks to focus on companies with strong growth prospects where a firm's advantages are not fully recognised by the market. The fund is benchmarked against the FT Europe ex-UK index.
Smith is not keen on financials as she believes the bank margins are being eroded by new entrants. She favours media companies as their products are taking up an increasing share of consumer expenditure.
Smith's investment process firstly looks at the attractiveness of a particular sector, the quality of the management of the company and then valuations.
Smith said: "When looking at the sector I am asking myself the question: 'do I want to be in this business?' I am looking at factors including the strength of the barriers to entry and the risk of substitution of the products the company offers. Also, when examining growth potential I am looking at the long term health of the economy and at the individual stock level I look for particular catalysts such as acquisitions, the company moving into a higher growth market or shifting into selling into emerging markets for example.
"The second stage of the process is more about my evaluation of the management from a strategic point of view: 'do I want to be in the business with these people?'"
Smith said in this part of the investment process she is aiming to understand the company's strategy, what it needs to execute this strategy and whether this is available to the business. She is also looking to assess the management's attitude to growth and to shareholders.
Smith added: "How much we pay for the business is stage three and I prefer to use measures which take account of the economic justifications for the business rather than accounting measures.
"I prefer to use cash return on capital investment rather than P/E ratios and if we believe a company that we otherwise like is too expensive we will wait for a buying opportunity."
She said stocks selected through this process tend to have a dominant market share and good quality management and although she favours stocks which have strong advantages she aims to add value by looking for those where these advantages are not fully priced in by the market.
Smith holds Italian oil company ENI which she believes has upside potential of 50%. The firm is looking to spin off its regulated gas division and regulated businesses tend to be lowly rated by the market, she said.
She is keen on media company Vivendi which has strong growth opportunities in the media content and distribution markets and Smith added it could double in value on a two year view.
M&G European is ranked 51 out of 89 funds in the Europe excluding UK sector over three years to 6 September on growth of 75.3%. The fund is 43 out of 99 over one year on growth of 30.5% and is 24 out of 103 over three months on growth of 0.3%.
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