European equities has vied for attention following the financial crisis. The region was slow to emerge afterwards and has so far failed to gain the required momentum to remove or at least limit the exceptional stimulus that has characterised the global financial crisis.
However, while the European economy has struggled with growth, the region is home to many global companies and as an asset class, it represents a significant proportion of the investment universe, so should not be ignored.
Rob Burnett is a very experienced European fund manager and has recently set up Lightman Investment Management, having spent 16 years at Neptune.
His Lightman European fund will be based on his investment philosophy and processes.
The fund will have a portfolio of 40-50 stocks. This is very concentrated given the number of countries and companies the fund could invest in.
Mr Burnett takes a contrarian approach to investing and looks for companies with positive operational momentum, meaning there is growth or at least improvement in the companies’ fundamentals.
The focus is on a high free cash flow as a proportion of the market value.
Unsurprisingly for a contrarian fund, valuations play an important role in stock selection. Attractive valuations help mitigate risk as well as presenting an opportunity to enhance returns.
Mr Burnett looks for companies with a low price-to-book or price-to-earnings ratio.
The portfolio structure is clear and easy to understand.
At least 80 per cent of the fund must be in European shares, excluding the UK.
Interestingly, the fund doesn’t plan to allow more than 5 per cent to be invested in UK listed companies, which will help diversify portfolios.
The portfolio is currently structured with a bias towards financials, materials and industrials.
Mr Burnett says relative valuations in European equities have reached historical extremes and quantitative easing has led the banks to drop to a huge discount to consumer staple companies, and as such he believes a recession is priced into markets.
Mr Burnett is a proven manager and it will be interesting to see how his first solo venture will progress.
Given the portfolio positioning and investment style, this fund could suffer in the current climate, but should be well-positioned for a rotation in style.
Adrian Lowcock is head of personal investing at Willis Owen
