Europe has by no means escaped the global financial turmoil, but James Buckley is sanguine
The current financial climate is undoubtedly challenging for fund managers, and Barings' James Buckley is no exception. "It's been very tough," says Buckley, manager of the Baring European Growth and Baring Europa funds. "Obviously markets have been extremely volatile for the past 12 months and that has intensified in the past three. The amount of sector rotation and stock volatility is the most intense I've seen in seven years of running money. Hopefully it will present opportunities but there are also real risks at the stock level."
As bottom-up investors, it is at the stock level that Buckley and his team spend most of their time. "We look to buy what we think are stocks where the market is undervaluing the investment opportunity, typically on a 12-18 month horizon, so it's not a short-term thing," says Buckley. "We place emphasis on our own research - we have a team of analysts, and I draw on their expertise." The funds' portfolios are quite concentrated - typically 45-55 stocks depending on the mandate. They have a large-cap bias but retain the ability to buy into mid-caps where opportunities emerge. "We avoid short-term thinking and try to be fundamental investors as much as possible," explains Buckley. Baring European Growth is an onshore UK domiciled fund, while Baring Europa is an offshore, pan-European vehicle.
Buckley says the performance of European stocks is driven by Wall Street, and European stockmarkets have underperformed the US year-to-date, though they have outperformed some emerging markets. With the economic outlook worsening, further policy easing from the European Central Bank is likely. "I believe we will see more cuts by the year-end - rates are too high and there is increasingly political acceptance of that," says Buckley. "The yield curve needs to steepen - it is not helping credit conditions, and I'm sure the ECB is acutely aware of that."
But despite the economic black clouds, European stockmarkets can and have performed well when the economy is struggling. "We don't need positive economic news to see a recovery in European stocks," Buckley says. "But it's very difficult to see European stocks recovering without some recovery - or at least a bottom - in the US market. That's historically been the case - though recovery may be getting closer given the increasing urgency with which the authorities are tackling the crisis there."
In spite of the global financial turmoil, Buckley has over a quarter of the European Growth fund in financial stocks. "Recently it's been the right thing to do," he says. "We had a significant underweight in financials but we have been closing that down in the last couple of months. We avoided Fortis and Dexia but are invested in BNP Paribas and Credit Suisse. It is not financials that have drifted lower in the recent sell-off, but industrials, materials and energy. If anything I'd be looking to increase our weighting - it's conceivable we'd go overweight in financials - though we are trying to pick those we think will come out of it with their brands intact or strengthened, such as Santander, BNP or HSBC (for the Europa fund)."
The European Growth fund's benchmark - the MSCI Europe index - is used for reference purposes only, as Buckley and his team are active managers. "With some things like financials, we're aware of the index weighting but we don't set out to be x or y above or below it," he says. As far as opportunities in specific sectors go, Buckley says the underperformance of financials relative to the broader market looks to be bottoming out, given the extent of action by central banks and the potential for disappointment elsewhere. "We are seeing profit warnings from all areas, particularly sectors like consumer stocks where valuations had held up well and the potential for earnings disappointments are increasing - that's an area I am wary of," he comments.
There are also opportunities for patient investors in materials, resources and energy, where Buckley says the scale of the sell-off since mid-July (some mining stocks have actually underperformed financials year-to-date) is throwing up opportunities where the long-term and medium-term fundamentals in terms of supply and demand remain relatively favourable. "If we do see evidence that China is not falling off a cliff, the potential for a rebound is intact," he adds.
"So in the short term I see opportunities in financials, and medium-term opportunities in other areas that have sold off," summarises Buckley. "I'm wary of consumer stocks. A good each-way bet is telecoms: valuations are reasonable but the scope for disappointment is limited - the sector will continue to look an attractive investment and we are overweight there."
The European Growth fund was recently upgraded from an A to an AA rating by Old Broad Street Research, which Buckley says is gratifying. "They've been talking to us for some time and we hoped we were getting closer," he says. "It's difficult in a volatile market because you don't know who else is doing what."
Buckley currently holds a manager rating of A from Citywire, but is unperturbed that this is lower than it has been in the past. "My Citywire rating has been AAA but I don't think there's anyone in the sector above A at the moment, because it's all based on consistent risk-adjusted returns," he says. "In more normal market conditions, I expect to do very well; at the moment, we continue to add value where we can."
The manager is quietly confident that the picture in Europe will improve over the medium term. "I think the market can go up," he says. "If you look at the number of indicators that are pointing at inflection points - the equity/bond yield ratio; forward price/earnings ratios; dividend yields versus bond yields and so on - we are at the point where the indicators tell you stockmarkets are oversold, and we have central banks on our side. Stockmarkets often discount the downturn in advance - I'm optimistic the next 12 months will be a lot better and I think we can make absolute returns."
If his analysis is correct, it could help Buckley to grow the funds he has been running for just over three years - the European Growth fund still has just £153.8m of assets under management (to 30 September).
"The fund could grow significantly," he says. "Given its large-cap bias and the fact we don't run a lot of institutional money, there's a lot of potential to increase capacity. I would hope that our medium-term track record (both of the funds and myself) would mean people would consider us if they were moving back into European equities."
James Buckley - head of European large-cap equities at Baring Asset Management
Buckley joined Barings in 2005 and was appointed head of European large-cap equities in 2008. He manages the Baring European Growth fund and the pan-European Baring Europa fund and is also responsible for European banks analysis.
Buckley joined Barings from Premier Asset Management where he managed the Premier European Growth fund. Previously he worked at Solus Investment Funds running the Solus European Growth fund. He has also worked at HSBC Private Clients. Buckley has a BA (Hons) degree in English Literature from the University of Ulster, an MSc. in Investment Analysis from the University of Stirling and an MBA from Cambridge University.
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