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Interview made by Pierre Gelis for Funds Magazine.

What valuation method seems effective in our environment of negative interest rates?

Conventional valuation tools still work, as nothing has changed fundamentally. We are still in the same world, and companies have not changed. However, valuation multiples in some sectors do look overdone to me. One of these sectors is food and beverages. In the current environment of very low or negative interest rates, the argument that this is a highly stable sector in terms of earnings and cash flow has pushed price/earnings ratios as high as 20, 25, or 35 times, which I think is crazy. I have my doubts when people try to convince me to overpay for a stock because it is supposed to behave like a bond.

What surprises you the most?

Be wary of the multiples the market is trading at but not necessarily of the tools that it uses. When it comes down to it, the market is schizophrenic in paying very high multiples for some sectors while, in other sectors such as energy, multiples are still depressed even though they have better positive exposure to what could happen in the coming months. In theory, this is due to a premium on security. It makes sense to overpay for visibility when growth is weak and when earnings growth is flat. But now the economy has recovered and earnings are rising. So it no longer makes sense to overpay for earnings growth.

In your investment process how do you determine the number of ideas needed to build up a portfolio?

We usually have almost 55 holdings in the portfolio. This number gives me both good diversification of each stock’s specific risks, while, at the same time offering convictions that are strong enough so that each holding can have a positive impact on fund performance. This means balancing out the two opposing forces of diversification and positive contributions to performance. And then there is the human aspect, as 55 holdings are feasible for a manager, and we can keep up with all portfolio stocks.

OK, but how do you get your positions to deliver performance as regularly as possible?

The fact that there is the price you pay is closely correlated to future performance is why I make no changes to the investment policy. We keep an open mind and a close eye on companies’ macroeconomic and fundamental aspects. Because of this, investment ideas can change. By repeating the same process, idea by idea, sector by sector, we ultimately create a portfolio that is compatible with locking in positive returns. And that seems to work, despite some disappointing quarters. This year, for example, I had a poor first quarter, a good second one, and a rather neutral third one. Some ideas take time to deliver performance. Energy, for example, is a sector that should have worked earlier this year. I added to that exposure. And now the planets appear to be aligned for energy to achieve good long-term performance. From time to time, you have to be a little patient. That’s another reason I maintain some diversification.

How do you keep ideas from leading to a concentration of hidden risks?

Whether buying or selling, we research each stock but also how each stock interacts within the portfolio. Does this long or short position create a specific risk? If so, is that a good thing? Each team member’s experience is very useful in giving us an in-depth understanding of the European markets, and the correlations and non-correlations between sectors and stocks. We have been working together for decades. In addition to this qualitative approach, we check risks on a quantitative approach, which allows us to keep an eye on volatility, concentration and contribution to tracking error. This analysis most often confirms what I believed from the start. From time to time, I have to make incremental adjustments. Invesco Euro Equity Fund’s track record shows that we capture more value than we lose compared to our benchmark, the MSCI EMU NR.

What do you think the difference is between valuation and value?

It’s mainly a state of mind. If I were to call myself a value manager, I would be painting an unflattering picture of what I do and of my way of reasoning. True, the concepts of valuation and value are very often rather similar. Looking back at the fund’s past five years, I find that, most of the time, the portfolio has been invested in value stocks. Even so, last year a bought a nice position in Ryanair, which is a classic growth stock. At that time the stock was available at a cheap price. From a valuation perspective I cannot ignore the opportunities that exist outside the segment of reputed value stocks. So I bought Ryanair in summer 2016 and sold it last summer after a very good performance achieved faster than expected. That’s why I give priority to underlying valuation and not just whether a stock is a value stock.

Pierre Gelis, Funds Magazine

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