The 2CG European Capital Growth Fund has beaten its benchmark, the FTSE Europe ex UK Index, in seven out of the past 10 years.
The fund’s manager, Chris Garsten, prefers investing in companies where profitability is below the trend, and there are triggers for improvement. When that is not possible, he buys unloved stocks that trade at a significant discount to fair value, or shares where the sustainability of margins is above expectations.
Garsten’s biggest bets include the consumer goods sector, where he has invested 23.7 per cent of the fund, compared with 15.6 per cent in the benchmark. Consumer services account for 7.7 per cent of the assets, as against 5.8 per cent in the index.
What’s your view about the Eurozone sovereign debt crisis?
Can I be cheeky? Unless you want to invest in, say, Greek sovereign bonds, it doesn’t hugely affect us. Nestlé [a significant part of the 2CG fund] has no significant exposure to Portugal, Ireland or Greece. If Greece turns more sour, it’s not going to affect the Nestlé outlook very much.
What’s the outlook for European companies in emerging markets?
I am amazed that pretty much all companies are fixated with emerging market growth. I believe in Asian growth but am somewhat surprised by the valuation chasm between the companies in favour and those that are out.
One of your biggest bets is consumer goods. Why?
We have Nestlé, Heineken and Danone. The last is phenomenal – its volumes grow well every year and, in the US, Americans should like it more, given its quality.
How have you played the German energy market?
Germany wants a major proportion of its energy to come from wind in the long term, but that involves huge capital expenditure. The Germans will be buying electricity from peripheral countries. That’s why our one utility is Fortum, the Finnish energy group.[The fund’s joint-biggest holding, Fortum accounts for 4.1 per cent of the assets.]
Roche is the fund’s joint-largest stock, equal in size to Fortum. Why?
The company is growing well, and its significant products are not due to go off patent for several years. When they do, the sales won’t fall by 90 per cent the next day.
Financials are one of the fund’s bets. What do you look for?
Topdanmark, the Danish insurer, uses surplus cash flow to do share buybacks. It doesn’t do expensive acquisitions; it doesn’t have integration problems. I’m sure some global company that has no business in Denmark will buy it.
Do you worry that share buybacks can be unsustainable?
The group’s strategy has to be right; that way, you can do it. Some other financial groups (not Topdanmark) bought back shares in 2006 and 2007 but later had to have rights issues to get out of jail.
You’ve bought tobacco groups. What were the key attractions?
I run a European fund but I bought some UK stocks. We have both Imperial Tobacco and BAT. It’s a phenomenally profitable industry that is taking a heck of a long time to die.
We hold Swedish Match, which has a business in snuff, a form of tobacco. This operation is stable, but offers decent growth. Again, the share buybacks are attractive: over a decade, the company has bought back and cancelled half of its share capital from cash flows. Don’t underestimate the power of share buybacks.
HeidelbergCement is one of your top 10. What’s the major factor?
The pricing holds up reasonably well, and it remains cash-generative. We have Lafarge, too. Given the nature of cement, it’s a regional monopoly, in effect.
So are you concerned about regulators?
Cement groups do get fined, but often the simplest businesses are the best. By contrast, we have no technology or telecoms; phones are a difficult market. We use our mobiles more, but the telecoms groups have had problems in converting the extra usage into extra revenue. There has been talk about towns in England trialing free internet. I don’t know how we’ll use mobiles in five years, but we will still use cement.
Why are you heavily underweight in oil and gas companies?
The cost of extraction is one problem. Cash is another: once you’ve paid the dividend, free cash flow is limited. Then there’s tax. I think oil groups would be value traps.
What other investment criteria do you apply?
We look for companies that are reducing debt, a policy that can bring excellent returns. For example, we formerly owned the German electricity utility RWE, which enjoyed first-class performance under the leadership of Harry Roels, who sold non-core assets at prices that enhanced earnings.
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[article by Alex Jolliffe, IR magazine]
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