Jeff Currington, manager of Norwich European Equity, discusses the market outlook and how it affects portfolio construction
The US market is bottoming out, which will affect European exports but the remainder of the European market is likely to remain resilient to the downturn, according to Jeff Currington, manager of the Norwich European Equity fund.
Currington recently won the Europe ex-UK sector award at the Investment Week Fund Manager of the Year Awards for the consistency in his approach.
Having bought into technology stocks during their rise through 1999, Currington trimmed back the portfolio prior to the bubble bursting, finding solid returns in the defensive old economy sectors.
Over one and three years the fund has been ranked third and fourth respectively in its sector, with below average volatility. The AA-rated fund has a standard deviation of 6% compared to the European ex-UK sector average of 6.5%.
Currington describes his style as growth orientated and risk controlled with a broad, top-down view.
How do you go about selecting stocks?
We look for fairly classic things. We look at the quality of the management and its understanding of the business. The management must be able to describe how it's going to get to where it wants to be in five years time.
We're not expecting it to have grandiose plans, just a realisable and sensible business plan that we understand and can check on at a later date.
If a company has excess profitability we want to see some reason why it can maintain it, rather than just have it competed away. We are looking for patents, brands or perhaps large market shares. Cashflow generation is the other thing we look for. In good times it means that a company can grow its business without coming back to us and in bad times it means it can survive where others can't.
Is there much scope for flexibility in the amount of stocks you have at any one time?
There's flexibility. We normally have a portfolio of 80 to 90. We don't run concentrated 30 to 40 stock portfolios. With diversification there are limits on the size of the bets that we take on each stock.
What we are trying to be is consistent, we're not trying to shoot the lights out over one particular period. We're trying to be consistently good rather than occasionally brilliant. There are times when the size of the portfolio has gone above 80 and other times when it's gone below.
During the real bull market in tech stocks the portfolio size went up because we were investing in smaller tech stocks and software companies, so stock numbers touched 100. There are other times when it has been down towards 70. Broadly speaking it is an 80/90 stock portfolio, which is something we are happy with as in addition to consistency, it reduces the risk profile of the fund.
What kind of stocks do you tend to favour?
There's a balance across the range. I tend to favour mid caps, the smaller mid to large caps generally.
That's because we tend to find the best individual stock ideas where fewer people are looking. The fund does hold some small caps but generally only single figure percentages of the fund at any one time are in small caps.
Do you take a country or pan-European view?
In terms of how we implement our top-down view it's either through themes or through sectors. These days it's almost irrelevant whether a company's headquarters are in Zurich, Frankfurt or Paris.
There are a few stocks like retailers where country weightings matter but by and large most large caps are pan-European and many are global. The percentage of sales in Switzerland for a company like NÃ©stlÃ©, for example, is less than 10%.
We do make sure we're not too over or underweight in countries just in case there's a taxation or political change that might affect the market but those sorts of events are very rare and are not predictable in most cases.
What were the key decisions for you over the past 12 months?
Given that it's been a difficult year and that we've been through a merger in that period, it's been a good time to be consistent.
I think I'd highlight the fact that we identified the timing of the tech bubble about 15 months ago and took quite a lot of money out of the tech area at that time. We had another go at reducing our weightings there again last autumn when we began to see signs that the US economy could be slipping towards recession. We also sold some cyclicals at that time, so the fund became quite defensive, more defensive than it would normally be.
Perhaps the most distinguishing factor over the past 12 months has been that growth funds aiming at the consumer have done well. It's the growth funds aimed at the investment market that have struggled. So where we've been able to find consumer growth stocks, and there aren't that many of them, they've performed quite well.
What do you see as the major themes in European equities at the moment?
I think most people have been surprised by the speed of the reaction to the US slowdown in Europe. Three months ago people were still expecting economic growth to be well over 2% and now expectations are 1.5% or below. I think we've now seen the worst of the downturn.
Bear in mind that there's been no real boom in European consumer spending. There was in one or two countries, such as Spain and Ireland, but in the core EU countries, Germany, Italy and France, a boom had not got going in the first place, so it's hardly likely to get too much worse.
There's still fiscal stimulation of the economy with government spending high and tax cuts still to filter through. Interest rates will probably come through in the second half of the year, as it becomes clear inflation is peaking.
Things are very different in the export market but I don't expect that to impact too much on the rest of the euro economy. It will be a disappointing year this year but we should be back to more than 2% economic growth in 2002.
The very short term will remain volatile and dependent on what happens in the US. The only other thing on a 12 month view is what happens with the euro.
It looks as though at some point there will be euro strength and if not euro strength then dollar weakness. I also think you will see euro strength against sterling at some point.
How important is the strength of the euro to the health of the European economy do you think?
It's the extent of movement against other currencies that's important. I wouldn't expect the euro to move dramatically. I can see it rebounding 10% against the dollar and that's not earth shattering. If it was to get back to the level of two years ago then that would clearly be negative for a lot of countries. The scale of movement that I see at the moment does not worry me.
How important do you consider EU enlargement?
I think it's a quite protracted medium term support for the European economies. If it's managed right then the opening up of Eastern Europe will play a similar role to that which Mexico plays to the US. It will help provide a relatively low-cost, high-skilled workforce and at the same time provide a growing market for goods produced in Western Europe.
The workforce in places like Poland and the Czech Republic is considerably more skilled on average than it is in Mexico.
Most of the Eastern European markets are composed of banks, telecoms and oil companies and these are not companies that are particularly sensitive.
A lot of the good companies have been bought up by Western businesses and are now tucked away as part of the likes of NÃ©stlÃ© or whatever, so you can't reasonably get exposed that way.
What's your view on the US? Has it bottomed?
Our US economists looked back and found that there were 10 indicators that had some sort of predictive quality.
They discovered that eight were predicting the economy would trough in the third quarter and that there was only one occasion since World War II when the indicators were predicting a bottom and it hadn't happened.
If that's right then the signs are that we are quite close to the bottom.
The one risk factor is that US consumers have so far remained impervious to everything that's going on and if they were to crack then there would clearly be another lurch down.
We're looking around for ideas to benefit from that. The problem is that valuations in many cases have taken on board quite a bit of recovery.
It's difficult to find good stocks at the moment.
FUND MANAGER: Jeff Currington
Currington is head of the European equity team at Morley Fund Management, CGNU's asset management arm. The European equity fund has assets under management of around £350m.
The Europe team comprises six fund managers, headed by Currington and 16 sector analysts.
Currington joined Norwich Union in 1981 as a trainee in the economics team, subsequently transferring to the Europe team.
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