Blackrock Continental European fund

by

4 Dec 2012

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

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

“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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