The Eurozone has lurched from crisis to crisis over the past five years. Despite the best efforts of the European Central Bank (ECB), the region has remained largely unresponsive to resuscitation attempts, and is still on life support. Deflation, non-existent economic growth, and ongoing battles with Greece – the prognosis does not look good.
But now, the weakness of the euro will be like “oxygen” for the Eurozone’s economies – as well as for ordinary people, says top fund manager John Bennett.
At the start of March the ECB started buying up bonds as part of its quantitative easing (QE) programme, aimed at injecting €1 trillion into the ailing Eurozone. The euro had begun weakening last summer, but since the programme kicked off it has slumped even further against a number of other currencies, and recently fell to a seven-year low against the pound.
QE has widely been perceived as a tool to prop up ailing economies. But the truth is more nuanced than that, Bennett says: “The effect of quantitative easing is all about currency. It is not about stock markets.”
He adds: “QE makes the rich richer. When governments print money, those nearest to the money are the beneficiaries, so the banks, the asset managers will benefit. That said, the oxygen coming in for the economy from currency weakness benefits the man on the street.”
Glasgow-born Bennett manages three of the best performing European funds on the market. His Henderson European Focus fund is ranked fourth out of 95 peers, and it has made an 81 per cent return over the last five years. There is only one or two per cent difference between his fund and the number one spot in the rankings.
Bennett has been investing in European equities for the duration of his 26-year career, rising through the ranks from stock analyst to star manager. He has done well out of Europe, but does not view the region with rose-tinted glasses. He lacks the blithe insouciance that some fund managers have towards the negative side of their sector. Refreshingly, he is open to discussing the bad bits about Europe.
As recently as 2012, Europe was not considered a place for sane or sensible investors. As with much else in Europe, the region’s stock markets were in a poorly state.
All this changed in the summer of 2012 when ECB president Mario Draghi gave a landmark speech, in which he promised to do “whatever it takes” to keep the Eurozone together.
Overnight, investor perception of Europe’s companies changed. Suddenly, local shares were considered worth buying. “I never cease to be amazed by human behaviour. Nobody wanted European equities in 2012 and now everyone wants them,” Bennett says.
To him, the continual refrain that Europe is broken is something of an irritation, because people fail to differentiate between their fear over structural problems in an economy and the safety of investing in well-established listed businesses.
“The most important thing about economics is that national economies are not the stock market. That is so important because people either don’t – or refuse to – grasp that,” he says.
By way of comparison, Bennett highlights that China’s economy has been growing at a rate of 8-10 per cent annually over the last decade, but its stock market performance has been dismal. If the health of a country’s economy was reflected in investment returns, you would have made a fortune in Chinese shares over the years, he says. Conversely, if Europe’s stock markets followed economic growth, equities would have grown by barely 1 per cent a year. This is far from what has happened.
Bennett’s success in European equities is not just down to the resurgence of interest from investors. He has a dogged focus on a handful of principles which have stood him in good stead.
He judges companies primarily on how much free cash flow they generate, and one of his first principles is a refusal to pay more for shares than he believes they are worth. This is crucial for European equities, because although many a fund manager has turned his eyes back towards the region, most have focused on buying shares in the biggest and most well-known companies.
This means shares in global leaders, such as Nestle, yogurt company Danone, and Inditex, parent company of high street clothing chain Zara, all rose very quickly. However, these companies’ earnings did not rise dramatically, so the price paid for shares in relation to their potential earnings – known as the price to earnings (P/E) ratio – looked poor.
The main criticism of the most popular European companies is that their shares are too expensive. Bennett limits himself to companies which are priced at a P/E ratio of under 20 times, although in exceptional cases he will bend this rule.
Because of this, he has sold down stakes in consumer staples companies including Anheuser- Busch InBev, the manufacturer of Stella Artois, Budweiser and Becks.
Bennett also insists on being a contrarian. Some of the most successful moments in his career have been when he refused to follow the herd.
There is an old adage in investment, “be fearful when others are greedy and greedy when others are fearful”. This phrase is bandied around so often it is essentially a cliché, but every now and again there is a seismic shift in stock markets which proves the adage true. Despite this, very few investment managers go against the herd. It is more comfortable to follow the consensus.
When taking a positive stance on unpopular companies “you get lonely and no-one wants to be lonely. You will have people tell you that you are daft, or you are lost,” Bennett says.
One of the reasons Bennett is so keen on contrary investing is because of his belief that there is a cyclicality to virtually all aspects of markets and company behaviour.
“Everything in life is cyclical, profits, growth and valuation. People think iron ore and cement are cyclical industries, and yes they are, but something else is cyclical and it’s called drugs and pharmaceuticals,” Bennett explains.
He took a contrarian stance on pharmaceuticals five years ago, and began buying up shares at a time when prices were depressed.
The industry was going through a difficult time, as pharmaceutical giants had spent a fortune on research and development but found few new blockbuster drugs.
They were also suffering the effects of the “patent cliff”, when exclusivity licenses expire and drugs can be widely manufactured as generics. Consequently, shares in pharma companies went from P/E ratios as high as 30 times, back down to just 8 times. He bought in at these low levels, and expects the sector will grow right back through P/E ratios of 20 times again.
“Pharmaceuticals are very cyclical, but they are long-view cyclical. We came out of a 10-13 year barren spell for drug discovery,” he explains. Medical science is on the cusp of a new boom, with gene therapy and oncology set to make great advances, he says. “This is hugely exciting and all it really means is we are in an upview in the science cycle.” He has invested in the European giants, including Roche, Novartis and UCB.
Holding this belief in the long-term cyclicality of sectors necessarily means an investor will have to hold stocks for a considerable period of time, as they wait for the upswing. However, this is easier said than done these days. The 24-hour newsflow and constant data releases can give anyone jitters, and make the temptation to tweak a portfolio almost irresistible.
Bennett says the key to having an edge is holding your nerve through the bad times, and trusting that your original conviction in a stock will ultimately come good. He is disparaging of analysts who operate with a timeframe of just a couple of months, and says he has been asked to justify two weeks of underperformance on his own fund – even though he is top of the sector over five years.
“The real trick in this business is taking a 10-year view,” he says. “We should never underestimate how short-term the market is. It is ridiculous really,” he says.
Another sector Bennett has backed on a longterm view is smart cars. He has positions in companies which make gadgets and components for more advanced vehicles, including driverless cars. More intelligent safety features are also becoming a requirement in some European countries. “It’s not about buying the car makers. I’m into the guys who are producing all the components... That’s all very exciting kit and that’s growth.” He has invested in Autoliv, which designs safety equipment, component maker Valeo, and Germany’s Hella which makes LED lighting.
Some European banks have worked hard to restructure since the financial crisis, and Bennett believes that, where consolidation has taken place, there may be opportunities for investors. He has selectively bought KBC in Belgium, ING in the Netherlands, and has also invested in the Bank of Ireland. However, they must demonstrate they are conservative business models. “I don’t want banks that are going for growth – bankers always go wrong when they reach for growth. Their ego kicks in and they take your money, leverage it and go off on ego-driven adventures,” he says.