BUYERS’ MARKET

As the UK begins its formal departure from the EU – where economic growth and political stability remain uncertain – we ask fund buyers: what’s the best way to play the eurozone? Are there bond or equity managers you are backing to outperform regardless of what happens in the region, or are you looking somewhere else entirely?

BUYERS’ VERDICTS

Jacques Lemoisson CBH Compagnie Bancaire Helvétique, Switzerland Brexit is the expression of a very deep structural problem in Europe. ESG investment is essential in asset management and if we apply it at the geopolitical level, why invest in an area where governance would be the least efficient?

Europe has been a value trap for years and there is no evidence that this will change with economic deceleration in Germany, social crisis in France, and political and financial instabilities in Spain and Italy. The euro is likely to continue weakening against the dollar as negotiations with the UK become tougher.

In this context, it is desirable, in relative terms, to avoid investments in the eurozone. If necessary, you should favour countries from the region with strong currencies, such as Switzerland and Sweden.

Due to verticalisation – the alignment of interests between the state and the companies of a country – the US and China look a better bet than Europe. The low relative valuation of Chinese stocks, for example, offsets the tight valuation of American stocks.

Faced with the dominance of passive funds, there are interesting opportunities to benefit from the over-representation of American assets in global indices and that of Chinese assets in emerging indices.

In a value trap context, I favour alternative investments in the region via pair trades such as long SMI/short Eurostoxx 50. I also prefer hedge funds and private equity strategies such as the Carlyle Europe Technology Partners fund.

Tom Baragry

Bank of Ireland, Ireland A hard Brexit could have significant negative implications for the Irish economy. As a result we’ve tried to ‘Brexit proof’ our clients’ investments by limiting exposure to both UK and Irish assets. We focus on managers with eurozone, pan-Europe or global mandates. Another implication of Brexit has been structural; in the last few years we’ve exited all UK Oeic vehicles and now only invest in EUdomiciled funds.

Irish investors have always had a strong penchant for property, traditionally investing in Irish and UK assets. Irish property has performed strongly in recent years while Brexit uncertainty has reduced the attraction of UK property.

Our preference now is for the greater diversification offered by European property via the CBRE Global Investors Pan European Core fund. In regions such as Europe and Japan, that have intrinsically low growth and negative bond yields, we favour equity funds that have a growth bias and that tend to underweight the banking sector. Two such funds that we hold are the Hermes European Alpha Equity fund managed by James Rutherford and the T. Rowe Price Japanese Equity fund managed by Archibald Ciganer.

With many eurozone sovereign bonds offering negative yields our bond focus is global. We’ve increased our allocation to the Pimco GIS Diversified Income fund as we seek to increase our exposure to risk assets but not our equity weights. We like the fund’s conservative approach focused on high-quality credit.

Harmen Overdijk

The Capital Company, Hong Kong We believe the global economy is recovering from a manufacturing slowdown over the past two years and the pick-up in industrial production will mostly benefit eurozone countries like Germany, France and Italy. This economic recovery will allow interest rates to move back above zero, which would greatly benefit the European banking sector. The global economic cycle is strengthening and therefore we favour equities over fixed income in the next 12 months.

Brexit and political populism are signs of the de-globalisation process that is currently ongoing. In our opinion, the current British administration is greatly

overpromising on the Brexit benefits, which could take years to materialise, during which time the UK

economy is likely to grow below trend. The UK equity market is not expensive but the same goes for the eurozone market.

We think that eurozone mid and small caps, and the eurozone banking sector, are particularly attractive. Indirectly this would favour European value stocks over the next 12-18 months.

A long-term trend in Europe is the drive towards sustainable investing, which could bring structural change to what investors put their money into. ESG investments tend to have a bias to value and quality stocks, which we prefer in this climate.

Christian Zschiesche Allfunds, Switzerland We do not offer macro research and therefore have no in-house market view, but we support our clients by selecting the most suitable products for their investment needs.

Our fund selection list contains several funds in each peer group, all of which fulfil different roles in an investor’s portfolio. As such, we expect these strategies to perform differently during certain conditions or market environments and each investor can chose funds according to their views and market outlook.

For Brexit we did not have to specifically adjust our list of selected funds. At the moment we favour mainly active and opportunistic managers who can adjust to the environment and have a track record of doing so in the past. We like funds that have demonstrated they can perform in all market conditions.

We see our main activity as providing our clients with information about the functioning and characteristics of funds, thus providing them with a sound basis for their investment decisions.

Ilaria D’Ascenzio

BNL BNP Paribas Private Banking, Italy Despite the uncertain period we are living through, there are still good European funds to invest in. A strong and fitting example is the Comgest Growth Europe strategy, which is able to deliver strong performance, combining a very structured investment process enhanced by a perfect integration of ESG criteria.

Richard Gallagher

Aviva Ireland, Ireland As asset allocators, we believe that tactical asset allocation within eurozone equity and fixed income markets is becoming increasingly difficult. We favour a more strategic, broad-based approach to the region, where our holdings are held stable over the short to medium term.

As we move into the new decade, we continue to look beyond Europe for new sources of diversification. Globally, we expect to see increasing opportunities in both developed and emerging markets, where the best active managers can

outperform, as volatility returns,

and richer investment prospects present themselves.

If we do see a normalisation of market volatility levels in the near term, we would expect a return to prominence for liquid alternatives within lower-risk portfolios.

We particularly like the more fundamentally-oriented long/short multi-asset strategies, the best of which may have the opportunity to distinguish themselves should geopolitical risks continue to escalate. Our existing allocation to the DWS Concept Kaldemorgen strategy remains a key holding for us in this context.

Tiago Leal

Banque Cramer, Switzerland Europe needs creative pragmatism and flexibility rather than a slow and centralised technocratic system exacerbating populism. The

UK’s departure is another wakeup call. Furthermore, Europe being the next focus of President Trump will certainly not help. We therefore expect

growth to remain low for an extended period of time and the ECB to therefore remain accommodative, keeping rates and liquidity premiums at the lower historical range. This will be supportive for equities even though they are currently overextended in the short term.

We favour flexible and ultra-short high yield euro bond funds such as Flossbach von Storch– Bond Opportunities. This strategy has a long track record of delivering 4%-5% per year with limited drawdowns by managing duration extensively and thus extracting performance even from high-quality bonds carrying negative yields. We also like the Oddo BHF Euro Credit Short Duration

fund which has returned 2%-3% per year, with low volatility even within a major crisis. The fund’s managers are keenly focused on avoiding defaults and this is key in a complacent high yield market. We have a global approach to equities but one thing that works and should continue is the quality factor.

Even with a passive approach, quality has outperformed continuously in the last 20 years.

César Gil Cano

Bankia Fondos, Spain The UK has made its decision but there is still a lot of work to do. The market is kicking the can down the road and this will probably work for the first part of the year, but when we approach to the deadline of negotiations in the second half, volatility is likely to increase. This will make it more difficult find value, especially in equity stocks.

The strength of the eurozone is linked to healthy global trade too. Germany’s weakness is due, at least partially, to the Chinese slowdown, and the former could face a technical recession in a short period of time.

The US is also putting the EU under pressure with new threats and real tariffs on several European products.

In political terms, Germany’s CDU is facing a difficult situation, where Angela Merkel’s succession is not clear.

In France strikes are still undermining the economy and relations with the US are getting worse. Spain and Italy have become more stable in terms of government but both economies are slowing.

That said, valuations in Europe are apparently cheaper than the US, but are not so cheap compared with historical trends or with emerging markets. We are relying on some European funds because as a multi-manager we diversify globally, and if there’s still value in Europe only skilled selective managers will be able to separate the value trap from real opportunities.

In short we have balanced portfolios, focused on the US for quality, emerging markets for growth, and Europe for some value opportunities.

Alessandra Festini Cassa Nazionale Forense, Italy The stock market continues to be positive, but in a context of low growth, while on the bond front interest rates continue to remain low.

In this scenario, the search for the best risk/return ratio becomes extremely challenging.

Our goal is to improve the portfolio’s resilience and, based on our tactical allocation, it now makes sense to

reduce exposure to US equities. This is subject to various national and international dynamics, such as a trade war, impeachment, and last, but not least, the American elections in November this year. We have a similar view regarding European equities, which could be affected negatively by both Brexit and a trade war. Some emerging countries remain interesting, both as government and corporate bond issuers and for equities.

However, it’s key to carefully evaluate the political situation in specific countries as well as the fundamentals of their companies.

The illiquid market, such as private equity, venture capital, infrastructure, debt and real estate certainly look more rewarding in this uncertain environment. Our allocation to these classes will continue to grow.

Michael Thaler

TOP Vermögen, Germany Britain’s decision to leave the EU is the right one. Three years ago I would never have imagined that in 2020 I would hold that opinion.

But to succeed in the global economy there is a need for less red tape and the EU is doing the opposite – overwhelming entrepreneurs with too much.

Therefore, as a German I can tell the British it won’t be easy to reach an agreement with the EU nor with the next presidency of the US, but the struggle towards an agreement should be worth it. With this in mind, we will gradually raise our investments in UK stocks for our clients, which is not easy considering that we do not like basic resources and banks. We would prefer investment funds and ETFs with the FTSE 250 as a benchmark. Our second recommendation for investments in 2020 in Europe is, as you might guess: Switzerland.

SPOTLIGHT ON SELECTORS’ PICKS

Picking through the wide range of ideas mentioned by those surveyed this month, one which stands out is the Oddo Euro Credit Short Duration strategy. Named by Tiago Leal, the emphasis of this fund is to provide low volatility during a crisis in a seemingly unattractive market – euro-denominated bonds. This fund is overseen by Citywire A-rated Haiyan Ding and Citywire + rated Alexis Renault (pictured) and currently has €1.67bn in assets under management. The fund is interesting in performance terms, as its one-year figures track closely to the average manager in the peer group but the duo have produced strong outperformance on a three-year basis. Using Citywire data, they sit top quartile over the three years to the end of January 2020. In terms of allocation, the fund appears to have benefited from its euro-denominated exposure to US issuers, while also riding a relatively recent strong uptick among financials. The short-duration nature of the strategy was exemplified in the duo’s January commentary where they indicated that 41% of the entire portfolio is due to mature before the end of year.

Citywire Verdict Chris Sloley, Editor

This summer the Brexit vote will be as long ago as the referendum itself was from the London Olympics. While one event was praised for uniting a fractured nation, the other has been derided for its divisiveness both inside and outside the UK.

The one thing the two events share is the test of physical and mental strength they take to complete. For those based in the UK, Brexit feels like a marathon with many miles still to go. As our readers show this month, how to play a post-Brexit Europe is mentally taxing and something that only those at the height of their powers would seek to take on.

For many we spoke to, pragmatism and agility were key qualities for competing in the field. Tiago Leal, for example, is focusing on short-term bonds, as well as singling out those managers who have shown their mettle during tough periods. Christian Zschiesche took a similar tack and talked about flexibility and opportunistic allocations. Others are being pulled into more offbeat areas, with a handful of those canvassed raising the spectre of more illiquid assets, such as infrastructure and private equity. Alessandra Festini hopes to be among those in the right place at the right time as the market turns, while Ireland-based Tom Baragry is watching from his close vantage point to see what happens to real estate investments.

What really came to the fore in the responses was an air of caution. César Gil Cano was critical of the slow process made on Brexit in general and the knock-on effects for the region, which was a point reflected by Jacques Lemoisson, who questions the deep structural problems that have yet to be addressed.

However, uncertainty often goes hand in hand with value opportunities, a theme picked up by many selectors. This could reveal attractions in diverse areas such as eurozone small- and mid-cap equities, as well as banks. However, others want to stick to quality or shun Europe altogether.

Ultimately, the respondents are united by their differences. Just as Brexit meant different things to different members of the UK’s voting population, how to adequately respond to the fallout is likely to be a similarly splintered story.

SELECTORS’ FAVOURED FUNDS Fund Manager Citywire rating Carlyle Europe Technology Partners n/a n/a DWS Concept Kaldemorgen Klaus Kaldemorgen

CBRE Global Investors Pan European Core Jeroen de Grunt n/a Hermes European Alpha Equity James Rutherford n/a T. Rowe Price Japanese Equity Archibald Ciganer

Pimco Diversified Income Daniel Ivascyn, Eve Tournier, Sonali Pier, Alfred T. Murata

Flossbach von Storch – Bond Opportunities Frank Lipowski

Oddo BHF Euro Credit Short Duration Alexis Renault, Haiyan Ding

Ivascyn & Murata Tournier

Renault Ding

Dobler, Cosserat, Weis Pier

Wittet