John Pennink, the manager of British Empire Securities, a £725 mn ($1.13 bn) international equity fund, smells fear in the markets. Companies in his portfolio have an average discount of 37 per cent, excluding cash – historically a very high number.
It shows investors how much the share price of each stock is below his estimate of its net asset value. ‘It reflects a lack of belief in the equity markets,’ Pennink says.
The contrast with the half-year to the end of March is clear: then, the equity markets were more upbeat, toughened by an apparent upturn in the world economy, he adds.
But even at that stage, Pennink accepted that the boost had been bought by higher government spending, ultra-low interest rates and quantitative easing.
The levels of debt to GDP in much of the developed world were still high but the burden had moved from the private to the public sector. The result? Markets were calling into question the solvency of sovereign borrowers.
Where does he chase returns in fearful markets? He’s put half the portfolio in Europe, and his 10 biggest stocks hold clues about marketing stocks to international fund managers, despite the eurozone’s sovereign debt crisis.
IROs can gain insights about promoting their companies in a continent that has more leverage and less good news than many emerging markets.
Vivendi, the communications and entertainment group, is Pennink’s biggest stock. He is no bull about economic growth next year, so defensive companies are appealing. Vivendi trades on a 30 per cent discount, has a price/earnings ratio of six, and a dividend yield of more than 9 per cent.
He also backs Investor, the Nordic industrial holding company, which trades at a discount of 37 per cent to its net asset value. Pennink admits that its portfolio of businesses, largely international, will be affected by the world’s slow growth.
But he argues that Sweden – where Investor has a major operation – has performed better than some other European economies and has the flexibility of its own currency.
He invested in Deutsche Wohnen, the property company, because it has a core market in Berlin. The German capital’s residential real estate trades well below replacement cost and enjoys rising occupancy and rents.
The area is still not highly indebted, he says, and Deutsche Wohnen itself trades at a discount of about 20 per cent.
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