Europe is a challenging region to invest in, but a focus on companies that are leaders in innovation and social responsibility sets Citywire AAA-rated Mark Denham apart (1).
A veteran in European equities – at Carmignac for the past four years and Aviva and Insight beforehand – Denham has delivered top decile performance to investors in the recently-launched FP Carmignac European Leaders Oeic fund (2).
The Fund returned 14.0% in its first year, to 15 May, at a time when its comparator benchmark displayed a negative return of -6.7% (3). Denham attributes the performance to a disciplined investment process that avoids sectors in decline and favours companies capitalising on secular growth.
‘I’ve been investing in Europe for more than 25 years and the emphasis has got to be on secular growth – invest in companies that can grow under their own steam,’ he said.
A third of the fund is in the high growth areas of technology and biotech. A quarter is in ‘Steady Eddies’ – market-leading consumer staples and pharmaceuticals companies. A similar proportion is in industrials, which in theory have higher sensitivity to economic activity but Denham shuns big industrial cyclicals like engineering companies, carmakers and chemicals companies and backs those that exhibit some element of secular growth, such as windfarm development.
FP Carmignac European Leaders is underweight financials, 6.6% versus 14.4% for the MSCI Europe ex-UK index as at 30/04/2020, and prefers financial infrastructure firms, such as exchange providers, over banks and insurers. They tend to have low, volatile and unpredictable profitability – the opposite of what Denham seeks. ‘The takeaway is that you can’t follow the index in Europe – you have to be highly active,’ he said.
Alive and kicking
The fund is focused in 30 to 40 stocks and typically has an active share of 90% (82% at present). Many of them are global leaders.
While Europe might not boast global internet giants (such as Google, Facebook and Amazon in the US, Alibaba and Tencent in Asia and MercadoLibre in Latin America), it leads the way in what Denham regards as the next mega-trend – renewable energy.
‘Europe leads the world in renewable energy,’ he said. ‘Offshore windfarm development is growing more than twice the forecast rate for renewable energy at more than 20% per annum.’
Denham owns market leaders in wind and solar energy development. Another area he likes is biotech. ‘Contrary to what you might read in the press, innovation is alive and kicking in Europe,’ he said.
FP Carmignac European Leaders owns a clutch of biotech stocks which have doubled or trebled in value over the past year. ‘This is an exciting area – we think there’s much more upside to come.’
Denham mitigates risk by limiting total exposure to biotech to 8-9% of the fund and diversifying across four companies, each of which is developing a multitude of drugs and has a multi-billion euro market cap.
‘We could sell our entire exposure to this strategy in one day’ he said.
For Denham, companies with attractive long-term prospects exhibit two characteristics – high long-term profitability and the reinvestment of profits for future growth. He scores the 1,600-strong universe of European companies on a range of metrics pertaining to those characteristics from one (positive) to 10 (negative).
The result is a bell curve which reduces Denham’s universe to the top quartile of around 560 names with scores of less than four-and-a-half. Biotech stocks are the exception, but the portfolio overall must have a score that puts it in the top quartile on a weighted average basis. ‘That gives me room to have three or four names that don’t meet the letter of the law, even though they meet the spirit of what I’m trying to capture,’ he said.
Environmental, social and governance (ESG) screening follows. Holdings must meet a range of socially responsible investment (SRI) targets, which reduce the investable universe to 410 stocks. ‘We don’t just integrate ESG; we’re an SRI fund,’ said Denham.
In targeting low carbon emissions and reserves, companies with material exposure to fossil fuels are excluded. Companies involved in adult entertainment, armaments, gambling and tobacco are also filtered out.
MSCI ESG ratings rank companies relative to their global sectors and those with a rating of below BBB are typically excluded unless there is evidence of a company having a positive impact on society as identified by the United Nations’ sustainable development goals.
Carmignac complements negative screening with its own positive and absolute approach that focuses on impact scores. ‘We’ve extracted the four things that we think are most relevant to ask about a company relating to basic needs, empowerment, climate change and natural capital’ Denham added.
‘We focus on only the best’.
For more information on FP Carmignac European Leaders, visit the fund page
(1) Source & Copyright: Citywire. Mark Denham is AAA-rated by Citywire for his rolling three-year risk-adjusted performance across all funds he is managing to 30 April 2020. Citywire Fund Manager Ratings and Citywire Rankings are proprietary to Citywire Financial Publishers Ltd (“Citywire”) and © Citywire 2014. All rights reserved. You may only use this material for your personal and non-commercial use. No part of this material may be copied, distributed or adapted in any form or by any means without prior written consent. This includes but is not limited to all individual fund manager data such as rankings of fund managers and ratings of fund managers. Citywire does not accept any liability for your reliance upon, or any errors or omissions in, the Citywire Ratings or Citywire Rankings. Past performance is not necessarily indicative of future performance. The reference to a ranking or prize is no guarantee of the future results of the UCIS or the manager. (2) FP Carmignac European Leaders A GBP Acc is in the 1st decile of the Europe ex-UK Equity Morningstar Category for its 1-year performance as of 15/05/2020. Past performance is not necessarily indicative of future performance. Source: Morningstar Direct, Carmignac, 28/05/2020. © 2020 Morningstar, Inc. All Rights Reserved. The information contained herein: is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. (3) Comparator benchmark: MSCI Europe Ex UK Net Total Return USD, converted to GBP end of day. Performance of the A GBP acc share class from 15/05/2019 to 15/05/2020. The Fund was launched on 15/05/2019. 2019 performance – Fund: +18.2%; Comparator benchmark: +8.8. YTD performance as at 15/05/2020 – Fund: -3.6%; Comparator benchmark: -14.2%. Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor). The return may increase or decrease as a result of currency fluctuations, for the shares which are not currency-hedged. Source: © 2020 Morningstar, Inc. All Rights Reserved. Carmignac, 27/05/2020.
Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. The Management Company is not subject to prohibition on trading in these instruments prior to issuing any communication. The portfolios of Carmignac funds may change without previous notice.