“Corporates are more
cautious, they are investing
less, so we will see more
downgrades,” he added.
As a stock picker, he is
looking for companies
pay ing strong and growing
dividends and is happy
working in a universe of
1,300 stocks even looking
purely at ex UK small-cap
companies. There are firms
such as Amadeus, he says,
paying dividends for the
first time.
All in all, the operating
environment will be one of
lower growth for longer
and that what is needed is
an organisation and a
structure for Europe that
investors can believe in.
Aaron Barnfather, head of
European equities, Lazard
Asset Management
“Europe’s problems are
getting bigger.” Possibly
not the most upbeat start
to a European presentation
but not one that surprised
anybody, particularly when
it is from a contrarian
investor such as Barnfather.
“It is better to outperform
a falling market than
a rising one.”
In a falling market, he
said, it is more important
to protect capital, especially
in tough times with
compounding of returns
working on the way down
as well as the way up. Any
loss necessarily means an
investor has a gap to make
up just to get back to their
start point.
“You might make
money in the euro if it
breaks up.”
Most investors are concerned
the euro will break
up but Barnfather said that
any break-up could actually
benefit investors, adding
many underestimate the
size of Germany in any
index of currencies. Looking
at a GDP weighting
within the euro, Germany
makes up 28%, with France
(22%), Italy (17%) and
Spain (12%) as the other
major contributors.
Germany is an attractive
proposition on its own,
with a Deutschmark, if it
returned, probably trading
as a safe-haven currency as
well as benefiting from
lower labour costs relative
to the rest of the Continent.
If the euro breaks up, he
says, individual countries
will have to become more
competitive. The counter
to this is that it would cost
10% of its GDP.
But it will be extremely
hard to break the euro as
(a) it is legislated for by
Europe, (b) the first one to
do so would be the only
one to do so, and (c) going
back to 17 individual currencies
is simply too
complicated.
% of overall portfolio invested in Europe
0%-25% 83.3%
51%-75% 0%
Source: Delegates at the event
Will the structure of the eurozone change?
Not yet, but it is
a real possibility 46.4%
No, not at all 0%
Source: Delegates at the event
EVENT ROUND-UP PA EXPERT INVESTOR EUROPE
Barnfather prefers to
look at companies’ financial
productivity and valuations
as well as their ability
to compound up. He looks
for high quality stocks and
suggests there are plenty of
them, with many trading at
or near their 2008 levels.
“We are getting into the
final phase of the market
downturn,” was his more
upbeat conclusion.
Andrew King, head of European
equities, BNP Paribas
Investment Partners
According to King, one of
the most important aspects
of assessing a company’s
prospects and risk profile
is to understand the structural
characteristics of the
industry in which the company
operates.
“This includes measuring
industry concentration,
26%-50% 13.4%
76%-100%
3.3%
Yes, because one/some
of the PIIGS will leave 14.3%
Yes, there will be
a distinct two-tiered
membership 39.3%
the relationship between
industry structure and profitability
and risk, and the
impact of consolidation
and fragmentation on
industry returns,” he
added.
The driver behind his
investment strategy is the
Herfindahl-Hirschman
(HH) Index, which is used
by the US Department of
Justice to help “properly
define and measure industry
concentration. Companies
that operate in wellstructured
industries have
a greater ability to generate
attractive and sustainable
excess returns, and can do
so with less risk.”
As a former analyst in
the sector, King used the
beer industry to make several
of his points, including
those with the highest
EBIT margins are generally
those with the highest HH
Index.
For example, SAB Miller’s
dominance in Columbia
and South Africa gives it
a very high HH Index
measure and a 42.1% profit
margin measured by EBIT.
On the other hand, Heineken
in the UK operates in a
more competitive market,
so has a far lower HH
Index and an EBIT margin
of just 7.5%.
One thing this does not
show, King says, is the risk
with mergers and acquisitions
rife in this industry –
any industry fragmenting is
outside the BNP Paribas
universe.
Another industry that
comes up favourably using
the HH Index is gas, with
profits and margins both
on the rise and have been,
with the obvious blip in
2008, since the beginning
of the decade. Looking at
some of the larger companies
involved (Airgas in
particular), their relative
share price is above the
2008 level.
Aaron Barnfather, Lazard Asset
Management
Andrew King, BNP Paribas
Investment Partners
JANUARY 2012 [www.portfolio-adviser.com] PORTFOLIO ADVISER
13
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