Over the past three years, the fund's annualised return has been more than two-and-a-half times that of its MSCI EMU benchmark
The Schroder ISF Euro Dynamic Growth fund has slanted its portfolio towards the Irish banking industry and energy sector.
Managed by Andrew Lynch since September 2002, the fund has had an annualised return of 39% over the past three years, compared to its benchmark, the MSCI EMU index, of 15.27%.
One of the fund's key themes is energy because Lynch expects the crude oil price to remain above $40 a barrel, which should help European oil majors maintain positive earnings growth.
The fund is overweight in Total and ENI, as well as Dutch oil services company Fugro. The portfolio is positioned towards Total, explains Lynch, because of the company's production and reserves growth, as well as a strong refining position where there is presently a bottleneck.
Although Lynch has an underweight position in financials, he is overweight Irish banking stocks because he believes they offer premium growth at a non-premium price.
He says: "Ireland is experiencing rapid economic and loan growth, which means the three main players in the market can all grow without having to be too competitive on prices.
"The fund has overweight positions in three of Ireland's largest banks, Allied Irish Bank, Anglo Irish Bank and Bank of Ireland.
These banks have been seeing regular earnings upgrades so, in spite of strong gains in the share price, they still do not trade at a premium to other European banks."
An underweight position in the telecoms sector, Lynch believes, has been good for the portfolio. He has stayed clear of this area because of concerns over margin pressure, increased competition in the market and profit warnings being issued.
Lynch has also limited his exposure in this area to one stock, Greece's Cosmote Mobile Telecommunications. He says this company is a pure mobile player and should enjoy good growth following expansion in central European countries such as Bulgaria and Romania, where mobile phone ownership is still relatively low.
Another top 10 holding is construction group Hochtief. Lynch thinks this stock is under appreciated in the German stock market and will benefit from public private partnerships ventures initiated by the government. According to Lynch, the firm has experience working in these types of ventures in the UK, Ireland and the US and is well positioned to gain contracts.
Lynch also has an overweight position in industrials, with a top 10 holding in Siemens. He feels positive growth in sales from China, as well as disposal of its troubled IT business, has been beneficial to its share price.
He chooses stocks by identifying companies that, as well as trading at a discount, also offer high potential growth through the ability to increase sales and profits.
The stocks he looks for must have strong business franchises, good balance sheets, quality management and the ability to finance growth internally and not through expensive acquisition. He looks for growth at a good price.
Around 65% of this fund is invested in companies valued at more than E2bn. No more than 5% will be invested in any one stock and the fund has the possibility to revert to a 20% cash position if need be. There are around 74 stocks in the portfolio.
He adds: "We believe shares are a stake in a business and we only invest if we would want to own that business. This means that, generally, our turnover will not be huge as we do not trade in and out of stocks over short periods of time.
"Having said that, I am not afraid to sell a company if its shares reach fair value - even if we still like its fundamentals - and we have a very firm sell discipline in place."
Lynch generally holds positions for 18 months, continually reviewing its fundamentals and operating environment, as well as meeting management.
An example of Lynch's sell strategy can be seen in Spanish wind turbine manufacturer Gamesa. He purchased the stock in early 2003 when it was trading at around E5.
He liked the company because it had strong balance sheets and a highly visible revenue stream, balanced between turbine sales and wind farm development. Lynch felt it was well positioned to benefit from the increasing focus on sustainable energy and from the rising pressure on companies to adhere to environment regulations.
He then decided to sell in mid-2004, although the factors attractive to the stock were still valid, feeling it had reached fair value at around E11 and that it was the right moment to take
Initial charge: 5.26%
Minimum investment: E1,000
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