Blackrock Continental European fund

Despite challenging macro conditions and outflows for more than five years, several European managers are currently citing an attractive entry point for their market.

While Mario Draghi’s OMT policy has alleviated pressure on banks, we are still some way from seeing them as investable.

Of several high-profile European equity franchises, Blackrock’s is among the most consistent, with several successful funds run off a core stockpicking strategy.  Its Continental European offering for example, has produced annualised returns of 4.0% over five years to end August, with the  average vehicle in the sector down almost  2% against a variety of macro and market  conditions. Its five-year numbers are even more impressive, up 24.4% versus the peer group’s  -8.7%, with most of this under current manager Vincent Devlin.Compared with the well-known European  Dynamic fund, headed by Alister Hibbert, Devlin says Continental European has the  same basic process with a few more  constraints  in place. This typically means  taking less aggressive sector and country positions  against the benchmark for example  and smaller stock weightings.

Information advantage

Blackrock has 15 European analysts feeding ideas into the managers, who use this information – alongside their own experience and  insight – to develop an information advantage against the market. With stockpicking driving the majority of  performance since Devlin took on the fund in 2008, he seeks five basic characteristics for holdings, although not every position will  have the full set.“First up is for a company to be in an  industry  with attractive dynamics, which has  largely  ruled out areas like utilities from the portfolio,” adds Devlin. “Second is for the  business to use capital efficiently and while  many firms are sitting on cash piles amid ongoing market turbulence, recent declines  in the Euribor rate should feed through to  lower debt costs and encourage greater  corporate  confidence”.A third element is for the management to  present a clear, explainable strategy and also have their facilities in terms of manufacturing, people and products to execute it. Last,  but very much not least, are growth and attractive valuation.

Picking industries

While stock selection has accounted for a large portion of excess returns, the portfolio is not sector neutral and Devlin is also keen to allocate capital to better industries. Over his tenure on the fund, this has largely been industrials and consumer discretionary,  with financials a consistent underweight,  along with utilities and telecoms.“While [ECB president] Mario Draghi’s Outright Monetary Transactions (OMT) policy has improved the situation and alleviated  some of the pressure on banks, we are still  some way from seeing them as investable,” says Devlin. “We are keeping in touch with a number of European banks but there remains too much regulatory uncertainty at present to invest. If  we could find one that met out criteria, it  would be possible to make some serious  money considering current low valuations.”Elsewhere, Devlin also highlights utilities as an unattractive sector, with excessive leverage and worsening dynamics as  electricity supply continues to diminish. “Several companies also used capital badly in recent years by accumulating poor-quality assets and we see management as pretty  average  in a sector with serious structural  issues,”  he adds.Healthcare is another area with problems but Devlin highlights exceptional stocks in  the sector such as Novo Nordisk, the largest  position in Continental European at 5%. “This is a company where the market grows by 5-10% every year, which is a huge advantage,”  he adds.  “Novo Nordisk has also shown itself to be extremely innovative in areas like drug delivery, creating its NovoPen for insulin injections  for example.”So far this year, Devlin’s sector underweights  have been beneficial to the fund’s performance  as these areas have struggled, with the lack of utilities adding around 1% to excess returns.

Elevating stock picks

Country weightings on the portfolio are  largely a function of stockpicking, with Devlin – alongside many of his peers – seeking  businesses with global reach and domicile therefore becoming much less important. This is evident from the fund’s holdings in  various companies in the beleaguered Spanish market for example, with Amadeus and Inditex both among the stronger performers.  “With Amadeus for example, 9% of the company’s  sales come from Spain, and while we  will analyse the effects of negative growth on  this, the local market is clearly not key to  overall performance,” says Devlin.Focusing on some of his key stock picks over recent years, the manager flags up Amadeus as well as Finnish lift company Kone.  Taking Amadeus first, Devlin says this transaction  processor for the global travel and  tourism industry is a strong example of a European  company with market-leading  products on a global scale. “The company  IPO’d in 2010 and was able to meet most of  our stockpicking criteria despite serious macro problems in its home Spanish market,”  he adds.