Schroders fund manager discusses European outlook and IFRS impact

Do fund managers have a genetic predisposition to be cheery? It probably helps, although too much group enthusiasm probably isn’t great news, acknowledges Andy Lynch, head of Schroders European Dynamic Growth Fund. ‘A lot of people in the industry have this disposition to be positive: The world is good! The world is great! The world is marvelous!,’ he admits.

But regular reading of gloomier pundits, like Dresdner Kleinwort’s Albert Edwards, who regularly warns of financial markets teetering on the edge of an Ice Age abyss, is a useful corrective, adds the 31-year-old fund manager, laughing. That said, European fund managers have had plenty of reasons to be positive recently: Lynch’s $3.83 bn European fund, which packs in 88 different stocks, for example, has risen almost 90 percent in the last three years.

Lynch says he tends to take a GARP approach, blending it with a strong dose of quality large caps. ‘One of the main things I’m after is the growth rate: what’s behind it, what’s driving it,’ he notes. ‘But I’m also interested in good pricing power – it shows you’ve got something different from your peers.’ Lynch meets European IROs regularly, and IR quality – he’s pleased to say – continues to improve.

Still, small-to-medium-sized companies (especially French ones) regularly fail to split the difference between organic and non-organic growth when reporting. ‘Or they don’t disclose in the release, but when you see them at a meeting they have the data anyway,’ says Lynch. ‘They tend to say, But none of our competitors do it! It’s a chicken-and-egg situation. No one wants to be the first mover.’

Europe is riddled with family-owned businesses, which carries both rewards and risk for a fund manager. But Lynch says most family-owned operations are extremely well run: more likely to be focused on the long term and often enjoying excellent employee relations. ‘They tend to keep a tight grip on cost,’ he notes. ‘The majority of their wealth is tied up in their own business.’

One family stock Lynch owns is Italcementi, an Italian cement business based near Milan. ‘The family is involved on the board but has a very professional management team – an excellent balance,’ Lynch says. He also owns Italian company Azimut Holding, a financial services firm where short-termism is institutionally banned. ‘It has this excellent system whereby all staff shares are held in a pooled vehicle,’ he explains. ‘Employees can’t sell their shares until they’re 65 and about to retire. It forces them to be thoroughly professional, so we own a decent stake.’

Financial companies like Azimut make up more than 30 percent of Lynch’s fund. The future for European financial services in general is being spurred by a greater interest in investment by Europeans, he says, as well as concern about the prospects of individual state pensions.

Deutsche Bank is a good example of a European financial player currently looking particularly good value, trading on just 8.5 times earnings, Lynch adds: ‘We are seeing a lot of value emerging as estimates have already factored in a steep slowdown. Deutsche is a business that looks genuinely mis-priced.’

Fund snapshot Schroders ISF European Dynamic Growth fundClearing the air
Lynch says the move to IFRS reporting standards means far more reporting clarity; and being able to compare numbers between firms easily, despite differing sectors, is a boon. ‘I’ve just been plowing through Électricité de France’s annual report,’ he expands. ‘I wanted to understand its nuclear liabilities for the decommissioning of power stations. All the info was clearly presented – that makes a big difference.’ Another French company, Saft, which produces high-end batteries, has also won Lynch’s respect. Saft was a management buyout spin-off of Alcatel batteries that relisted.

‘It has had enormous challenges since floating,’ Lynch explains. ‘It had a contract for night goggles with the US military, which suddenly turned the taps off. Then the price of nickel for Saft’s batteries went from $10,000 per tonne to $50,000 per tonne; currently it’s back to $30,000 per tonne. Massive volatility. Yet the management throughout delivered good results and gave investors clear guidance on the impact of the cost of the raw material changes.

That’s a very forward-looking, hands-on company.’ The volatility endured by Saft has also been experienced by others this summer. Ireland-based C&C, a Lynch stock that produces Magners Cider, was hurt as sales fizzled away between dramatic summer shower bursts and national flood warnings.

‘The vital question is this: is the Magners brand and the way it has been built up sustainable?’ asks Lynch. ‘Will people come back to it next year? Our perception is that Magners has brand equity and is a business that will recover.’

As to shareholder activism, Lynch isn’t an agitator – at least not publicly. ‘We try to do things quietly,’ he explains. ‘But yes, absolutely, we are committed to being engaged. If it gets into the press then everyone has failed. Once it gets into the public domain, it’s much harder to change positions.’

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