amLeague Portfolio Managers ViewPoint - Europe Equities Mandate - February 2014

amLeague is pleased to present you the new edition of its monthly amLeague Portfolio Managers Viewpoint.

This month, 2 Portfolio managers on amLeague Europe Equities Mandate were chosen to give their thoughts and comments on their portfolio choices and results.

Investment philosophy:

exane asset management has been building its European stock-picking expertise for more than 10 years, relying on the sector-specialisation of its investment team. The mandate is based on this stock-picking expertise by aggregating the best picks of each of our 10 industry fund managers / analysts within their universe. This team-managed approach leads to a high degree of diversification, and a well balanced mix of styles whose investment objective is to regularly out-perform the equity market

Investment strategy:

Our investment process has in two steps:

• stock selection done by our 10 industry experts, and covering all sectors (chemicals, consumption, banks, insurance and real estate, energy, basic resources, equipment, automobile, construction, health, technology, telecoms and utilities; in addition, mid cap universe)
• portfolio construction and risk monitoring done by the 2 fund managers

Portfolio characteristics:

• concentrated (around 40 stocks)
• sector neutral (vs our sector / industry breakdown weightings)
• with an equally-weighted active risk for all selected stocks within the same sector

➨ an alpha generation exclusively concentrated on intra-sector stock-picking

Portfolio positioning

As an illustration, 3 best convictions within each specialized universe held as at end February:

1. in the chemical universe : Solvay – belgian family group which merged with Rhodia in 2011, and is about to achieve its mutation process towards a less cyclical and more profitability-oriented group under the helm of the ex-Rhodia skillfull CEO. The company is currently engaged in a tricky divesting process of its more cyclical division, which is hampering the stock price. The sale's finalization should act as a powerful catalyst, leading to a less cyclical, high-quality niches profile. Finally, some negative headwinds which impacted the group’s other divisions in 2013 should reverse in 2014
2. in the telecoms universe : United Internet – one of the beneficiaries, as an alternative operator, of the coming consolidation of the German telecom sector and of the concessions imposed by the European Commission to the merging groups. A second business division (sites creation and web hosting) provides a “quality and growth” profile to the group.
3. in the basic resources universe : Rio Tinto – saw last year a deep change on the company’s focus towards improving free cash-flows and cash returns (high and increasing expected dividend), one of the best growth profile of the sector with a sound financial profile and several optionalities

Philosophy and process

Our core belief as active European Equity managers is that through detailed fundamental analysis we are able to identify the most important drivers of a business. By asking ourselves where we differ from the market either financially or operationally we are able to articulate our investment thesis and clearly identify what we believe will drive the share price. Identifying shares where our investment thesis is not priced in enables us to buy shares below their intrinsic value.

Our process is team orientated and we firmly believe the quality of our analysts is a key differentiator to our competitors. Our analysts are empowered to find the best investment opportunities from within their sectors by identifying individual stocks which are inefficiently valued by the market. Primarily they will look for companies where the market is undervaluing a company’s sales growth, operating profitability or balance sheet returns. This ‘difference’ compared to market expectations forms the basis of the investment thesis. Whilst the investment thesis identifies the market inefficiency and the analyst more accurately values the company, valuation alone is not usually enough for us to buy a stock; we also look for an inflection point or a ‘change story’. By this we mean identifying a stock-specific operational or financial event that would serve as a catalyst for share price or earnings growth over the next 12-18 months. The combination of these two elements – valuation and the inflection point – then informs the strength of our conviction call. Our team-driven process enhances the decision-making of analysts and ensures consistency of research output enabling cross-sector comparisons and common thematic or top down assumptions.

Positioning for 2014 - stock selection is crucial

During the nadir of the eurozone debt crisis in 2011/12, it did not matter what you owned in Europe: equities were sold off indiscriminately. This trend has now abated. Correlations are now much closer to normalised levels and set to reduce further as the eurozone economy stabilises and grows. It is our view that the focus has to be on understanding the shades of grey within the European market, rather than on making big country or sector calls. The European market in 2014 will be one for stock-pickers