“Amadeus has two key business areas, a basic global distribution system and an IT solutions arm. Rather than a company like BA doing its own flight booking and tickets, many are choosing to outsource and Amadeus has established itself as an international network. On top of this basic search and booking function, the group’s Altea customer management system also provides additional modules to travel businesses, automating processes such as departure control.”
Strong revenue generators
Looking at Blackrock’s various stock criteria, Devlin says this kind of successful software business will typically provide a good return on capital employed. He was also able to buy in at an attractive valuation of 12 times earnings and while growth is already impressive, travel companies tend to take a while to outsource so there is plenty more to come.
As for Kone, this is another global business benefitting from the strong recurring revenue element often key in niche areas. “As well as providing new lifts and elevators for buildings across the world, Kone also offers ongoing maintenance contracts and 80% of its EBIT now comes from this predictable after sales area,” says Devlin. “After installing the lift initially, Kone may develop a motor that uses electricity more efficiently for example and because of the maintenance contracts, it will do these swap outs itself. Lifts and escalators are also subject to frequent regulatory inspections and Kone has developed ways of doing much of this work remotely rather than having to send out the traditional engineer.”
European value
With many of his peers highlighting now as an attractive entry point for Europe, Devlin says there is certainly value to be found in the market. “Asset allocators have broadly been selling Europe since 2007 and even more heavily as the macro situation has worsened in recent years,” he adds. “Over this period, the index has been flat and our funds have been able to produce a positive return.
Amid ongoing uncertainty, two things are currently clear about Europe: there are several problem areas, so an active approach to stock and sector selection is vital and after five years of selling, the discount applied to the continent’s equities is high and there is value to be found.” Devlin says the macro situation has steadied in recent months, with the possibility of a eurozone break-up looking less likely as countries rallied round the single currency.
Central bank reassurance
While the manager says countries leaving the euro remains a distinct possibility, he notes the positive impact of an increasingly proactive stance by the European Central Bank. “More economic certainty should bring the equity risk premium down and create a more positive environment for European investing than over the last five years,” he adds. “Growth will remain scarce on the domestic front with austerity policies in the ascendancy but Draghi’s recent OMT announcement has created a three-year window to get things back on track.
The ECB’s last fiscal easing in 2009/10 only lasted a year and this longer commitment is a definite positive. “It will take time to feed through into the system but we have already seen the Euribor rate come down substantially and some Spanish banks issuing debt, which would simply not have been possible a few months ago. The major risk is that all this liquidity gets wasted but Draghi has certainly acted decisively to get the economy moving again.”
Alpha in all conditions
Looking at his own performance over the last few turbulent years, Devlin says his fund has produced alpha in a range of conditions – bear market, bull market, sideways market, risk on/risk off – highlighting the benefits of seeking the best 50 stocks in Europe at any particular time. “In the past, investors tend to own separate value and growth funds but most now want a European product they can buy and hold to cover off that part of their asset allocation,” he adds. “Our consistency of performance against very different backgrounds shows we can effectively smooth out the market, which is increasingly important in this era of much shorter, sharper economic cycles.”
Higher turnover
For Devlin, his role is simply to allocate his clients’ capital efficiently and the fund will therefore change in line with conditions, which has meant a higher turnover than many peers. “Overall, the fund has performed against very difficult conditions and with more economic clarity emerging, we would expect things to be easier over the next five years than they have been in the last five,” he says. “Our aim of owning the best 50 stocks has consistently performed and we feel the compounding effect of similar returns over the coming years could make a big difference to people’s pensions.”
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