skandia's david dick sees top-down approach as a critical tool in any stockpicking strategy
Top-down analysis can be a valuable part of a stock-picking management style, according to David Dick, head of European equities at Goldman Sachs.
Dick, manager of the new Skandia Continental European fund, said while the majority of managers claim to be stock-pickers, their generally poor performance around inflexion points in the market reveals their macro bias.
'Even though most of us say we are stock pickers, in reality our portfolios can be infused with a series of intended and unintended top-down positions' he said.
'We don't want to just take these top-down bets because by definition they are unpredictable.'
Goldman Sachs has an emphasis on research, with Dick running a team of 24 analysts visiting companies in Europe and other regions, as well as their suppliers and competitors, for different perspectives on investable stocks.
'Just because we are picking stocks it does not mean we don't know the effect of top-down themes on the companies in which we are investing,' he said. 'The difference between average research and great research is the ability to understand the sensitivity to changes in the macroeconomic environment of the companies in which you invest.'
Dick noted this added research dimension saw him sell out of Phillips, Lufthansa and Infinion in the wake of the terrorist attacks in September 2001 because they were economically sensitive, had large amounts of balance-sheet gearing and large fixed cost bases, which meant they would likely be in financial difficulty if the economic environment turned poor.
He identified a number of themes in the European market that led investors to shun certain market sectors and miss attractive stock opportunities.
The inflexibility of European labour market laws led investors to assume that the recent takeover of Credit Lyonnais by Credit Agricole would not yield substantial cost savings in the form of reduced headcount, Dick noted.
However, he said, he has been buying Agricole stock after an examination of the bank's demographic profile revealed a skew towards 45-60 year-olds, to whom it will be able to offer early retirement and therefore take significant costs out of the business.
Another concern for top-down investors is unfunded corporate pension liabilities. This has seen many companies put their employees' pension funds into bonds, which is a mistake, according to Dick.
'To us, equities are still the long-term asset class of choice,' he said. 'As a shareholder, if the pension fund of a company in which you invest only owns bonds, it will be making bigger contributions to its pension fund in the following five to 10 years than it would have to if it had a higher equity exposure.'
Weak consumer confidence has eroded sentiment among top-down players on retail, media and leisure stocks but Dick is still overweight in the sector.
'Even though the advertising outlook may be questionable, there are some interesting businesses, such as French radio stock NRJ,' he said.
'Radio is counter-cyclical, because it is a cheap form of advertising. When companies are cutting their marketing budget, they tend to trade down from television advertising to radio.'
Clarke replacing Balkham
'Deep-dive analysis of client behaviour'
Ways to mitigate April’s increases
The best equity income funds examined