Ollie Beckett, manager of Henderson Gartmore Pan European Smaller Companies Fund, gives his view on Pan European Smaller Equities
European smaller companies have spent years preparing for the upturn.
They will not have to wait long now, says Ollie Beckett, head of Henderson’s Pan European Smaller Companies team
Henderson Gartmore Pan European Smaller Companies Fund is the smaller, more concentrated sibling of the company’s €1billion Henderson Horizon fund that also seeks out small and midcap attractively priced, growing companies across Europe.
Since he began managing the fund, Ollie Beckett has outperformed the index by 4% in April 2011, and competitors by significantly more.
The fund is up around 30% year-to-date, 3% ahead of the benchmark, the Euromoney Europe Smaller Companies Index (formerly known as HSBC Europe Smaller Companies Index).
‘At the margin, Europe is already getting healthier’
The Henderson Gartmore fund’s relatively small size allows a high level of flexibility with a focus on liquid stocks worth €800 million or more, typically in the lower quartile of European average capitalisations. The portfolio is more concentrated, usually holding around 85 positions, versus the 120 or more stocks in the Horizon fund.
With an average market cap size of around €1.4 billion, the underlying holdings offer ample liquidity, so investors should not be unduly concerned with liquidity issues in the fund, says the manager.
Beckett believes the improvements in Europe’s economic conditions may be far
greater than many investors, particularly those outside Europe, think. He is counting on a more domestic focus to deliver further results. And that is good news for European
smaller companies: they have spent the years since the global financial crisis improving their margins and adjusting their business models. When recovery comes, these companies will stand to benefit.
‘Europe is certainly getting better. At the margin, Europe is already getting healthier. PMI indices are all up. Spain, Italy and Greece are running budget surpluses. Admittedly, money supply slowed recently and credit expansion is stalled. But both should improve soon,’ Beckett says.
That positive outlook reinforces moves made by Beckett in the spring to re-orientate parts of the portfolio. In his own words, he “stopped apologising for being a European equities manager” and started looking for companies that can boost sales and profits as economies improve in their home markets.
‘We have seen three to four years of cost cutting by companies, all in a dire environment. Draghi’s whatever-it-takes speech and a real belief that the Eurozone will not collapse have now boosted investor sentiment. With politics off the front page, markets are overcoming any subsequent political noise far quicker. But it is also the things that investors have not noticed that inspire confidence,’ says Beckett.
Those unnoticed moves are important. Wages are still rising in Germany, but so is consumption. Wages in Spain and Greece are falling. More rebalancing is required, yet every little change is a step in the right direction. The fact that German firms are moving their IT departments to lower cost locations such as Barcelona is a good sign, thinks Beckett.
‘Germany has imposed on others what it could not do outright by itself. Things have changed far more than people perceive. We may also be at the limits of the austerity forced on other economies by Germany. We just need to get money moving again,’ he says.
The fund is focused on recovery and those stocks best poised to benefit. They are not the global titans that investors have relied upon to deliver growth in recent years. Domestically-focused EU firms are leading the pack, with positive earnings-per-share revisions rising, whilst consumer and industrial stocks exposed to emerging markets are experiencing sharp falls in the number of upward revisions.
Even the biggest ‘old reliables’ are suffering. As Beckett points out, yoghurt-maker Danone, a large cap portfolio staple – was recently forced to issue a profit warning. The company will miss its full-year targets after baby milk powder scares and the slowdown in China hit its international ambitions.
‘Last year, international investors thought the Eurozone was on fire. Companies relying on global growth seemed a better bet. But now it is definitely a case of ’better the devil you know’ as emerging market risks seem so much higher,’ he adds.
Many of Beckett’s favoured stocks are also turnaround stories. They include Nobia, a leading kitchen supplier based in Sweden. It brought in new management three years ago from Electrolux. The team has plenty of experience in cost-cutting and tightening margins in the household electrical goods sector. The new management has reduced the number of production sites, cut products and slimmed ranges.
‘Nobia’s gross margins are up, but not the top line - yet. Its core Swedish and UK markets are picking up as housing recovers, other markets will follow. The company will get a lot of leverage through P&L, then profits, when that happens. It is an almost ideal situation,’ says Beckett.
Another of the fund’s top ten stocks has turned itself around in a tough consumer discretionary environment. Danish jewellery chain Pandora, which sells bracelets, necklaces and charms, has gone back to its core market after failing to push into higher priced, up-market territory.
Beckett says management had ideas above its station, taking the products to
price levels that customers could not afford. The firm ditched gold for silver and returned
to its roots with localised products to suit individual tastes and wallets. According to
Beckett, the company remains cheap and is already generating good cash flows.
‘We are willing to be early’
If Pandora went too far, other firms continue to play the luxury theme well.
Italian firm YOOX has been a portfolio favourite since its IPO in 2009. It operates its own out-of-season, high-end fashion sites and also runs websites for the likes of Emporio Armani and Dolce & Gabbana. It has delivered growth by offering a wide range of lower-cost stock and this season’s must-haves.
‘With stocks like YOOX, we are willing to be early. When you are ahead of the game, the rewards are far greater. We always screen for our own ideas and visit each company involved, and don’t rely purely on broker recommendations. We want to be ahead of the big investment banks, not reliant on them,’ says Beckett.
At the other end of the scale, Sports Direct, the sportswear retailer, is also doing well from the move to online shopping. It is also pushing into Europe, with stores opening in Belgium, Slovenia, Portugal, Spain and France. Recent acquisitions have extended the company’s reach into Austria and the Baltics. Its most recent quarterly results revealed sales are up 18.2% and gross profits rose 23.2%.
European smaller company valuations are still attractive, despite the already impressive rally this year. Beckett says the sector may be the only one where valuations remain lower than they did in 2007. Both UK and US smaller companies are already back above previous values, adding more weight to the argument for further re-rating and rises in Europe.
‘While other equity valuations may get uncomfortable, European smaller companies still look good, particularly on price-to-book. That said, earnings upgrades will not be massive, we think less than the 10% to 11% next year that the market expects. Small and midcaps are attractive and will continue to outperform as the European economy improves,’ says Beckett.
European smaller companies are currently trading on a price-to-book of 2.2x, far below the 3.0x of their 15-year peak. Trailing P/E ratios are also below peak and not far above their
15-year average.
Source: Citywire Global, November 2013
