Fund Manager Q&A: Henderson European Focus
Please summarise your underlying strategy.
The strategy is a blend of top-down sector themes, combined with compelling stock-specific stories, with the aim of providing access to sustainable long-term growth trends in the European market. This is a contrarian strategy designed to capture long-term market momentum by correctly anticipating the catalysts for change in European (ex UK) companies and industries. Performance is expected to come primarily through stock selection and we take a long-term view, giving companies the opportunity and time to deliver on our original investment thesis.
Why do you believe European larger companies will prosper more in the foreseeable future than small and mid-cap companies?
We think that larger cap stocks offer the best prospects in Europe right now, with investors willing to pay a higher price for quality businesses where they perceive a greater source of safe income. There are not that many firms out there that can consistently deliver higher sales volumes and greater profit margins, so investors may be willing to pay a premium for those companies that can. We see this as a real thirst for yield that may push up P/E (price/earnings ratio) multiples to uncomfortable levels for certain companies.
What are some of the main challenges facing investment in European funds over the next twelve months?
2015 could see a significant pick-up in volatility, so investors should brace themselves for difficult markets. That is why stock picking is so important. By understanding a company’s strengths and weaknesses it is possible to be better positioned than the general market both in good times and bad.
We disagree with observers who maintain that European equities are still heavily discounted: they may look so relative to other markets but are not in absolute terms. Indeed, at the quality end of the spectrum, European equities look overvalued to us. And yet, should deflation really take hold, further price increases are likely for ‘growth’ businesses.
We think it is important to appreciate where we are in the cycle. Following the financial crisis, companies were good at cutting costs. Then they became good at sweating their balance sheets: they took advantage of low yields on bonds to reduce their financing costs and used share buybacks to lift earnings per share. What is notable though is the paucity of top-line revenue growth. There are not that many businesses out there that can consistently deliver higher sales volumes and greater profit margins, so investors may be willing to pay a premium for those companies that can. These challenges combined emphasise the importance of rigorous research and sound stock picking.
How successful do you think the QE programme recently announced by the ECB will be?
We try to avoid commenting on the macro; the news is already awash with blow-by-blow updates. The European Central Bank is clearly seeking to underpin the eurozone which, as we saw in 2012, can be very supportive for stock markets. But equities were cheaper back then and the market at an earlier stage in the recovery cycle.
What are the major positive and negative effects this could have on your strategy?
We live in a world of momentum investing, where investors fail to anticipate inflection points in the market, chasing events that have already happened, focusing on short-term news and quarterly earnings – a horrible trend that originated in the US. The way to get a competitive advantage, in my view, is to ignore it and focus on what really matters – cash flow. We always look at the cash flow, because cash will always out, as will value. That is why we think stock picking is so important. By understanding a company’s strengths and weaknesses we can seek to be better positioned than the general market in both good times and bad.
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Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. Ref: 34U
 Price/earnings ratio: a comparison of a company’s share price divided by its earnings per share – a widely used financial indicator used to compare the relative value of different companies, against the market average, or against a company’s own history. A high P/E suggests that a company is expected to deliver higher earnings growth in the future than a company with a lower P/E.