Given the current volatility, European market strategies are bottom up
The volatility of the European stock markets is causing fund managers to focus more on bottom-up stock picking methods rather than top-down strategies.
However, the latest research by offshore fund research specialists Forsyth Partners shows most European funds are heavily weighted towards the UK, Germany and France.
Calvin Vaudin, investment manager for the Ashburton European Fund, explains that weightings in these countries are not due to strategy, but because they form a large part of the benchmark index.
He says: 'We do not look on a country to country basis, but rather on a sector basis.'
Vaudin uses a top-down and bottom-up investment approach. He says: 'We look at sectors and see where we are in the investment cycle. We look at what sectors offers the best potential and the value of stocks to see if it is better or cheaper than anything else, we choose stocks on cash flows, dividends, price to book and comparisons.'
On a sector level, the Ashburton European Fund does not have large overweight positions in any area because the market is currently so volatile. Vaudin says: 'It is difficult to know where the market is going until we know exactly where the market is coming from.'
Vaudin has slight overweight positions in consumer staples because they are defensive type sectors, favouring Tesco, Boots and Marks & Spencer.
He likes Tesco because it has good value and growth and it plan to expand its business into the Far East, Boots because the company has done a deal with Sainsbury to allow it to sell brand drugs, and Marks & Spencer because the company looks like it will turn around.
The Ashburton European Fund has underweight positions in technology and financials. Vaudin says: 'We are still not keen on technology and telecoms and are 5% underweight in the area. Apart from the occasional rally there is far too much debt in the industry, visibility is still difficult and stocks are overpriced. They are probably 40% overvalued against the market.'
In the financial sector Vaudin favours insurance stocks over banks. He explains that there is not a large amount of corporate activity in the banking industry and banks are struggling.
Adrian Darley, senior investment manager on the Gartmore CS Europewide Fund, also does not look at asset allocation on a country by country basis.
His investment process is purely bottom up and country positions are a result of stock and sector analysis. Historically, in the Gartmore CS Europewide Fund country allocation has been underweight in Germany and overweight in Netherlands and France. This has been driven by the stocks and sectors within those markets.
Darley says: 'We are trying not to take sector bets, but we are focusing on stock selection. The market is so volatile it is not easy to predict the markets.'
Stock selection focuses on growth equities. Gartmore has 17 analysts as well as 10 European fund managers who undertake regular company visits.
Darley has been overweight oil and energy all year. He says: 'This has been driven by the oil and gas prices. Oil is denominated in US dollars which has been strong all year.'
The Gartmore CS Europe- wide Fund is also overweight pharmaceuticals. In this sector the company favours second tier pharmaceuticals such as Elan and Adventis because both companies have strong growth prospects and are developing new products.
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