Henderson EuroTrust (HNE ) fund manager Jamie Ross is unconcerned about the third-wave of coronavirus sneaking across Europe as he believe the pandemic crisis is over for the equity market.
Europe is being plagued by a third wave of Covid-19, which has officially become more deadly than it was at the same time last year with 20,000 people dying every week in the continent, according to the World Health Organisation.
This has seen European countries plunged back into strict lockdowns, with Germany extending its restrictions, Paris and other French regions have imposed a month-long lockdown on top of the 7pm to 6am nationwide curfew that is in place, and Italy is planning a country-wide shut-down over the Easter holiday.
None of this, however, is bothering Ross – manager of the £301m portfolio of European equities – as he believes the rotation from growth to value seen across major markets signals investors’ optimism about the future.
‘The equity market is making the call that the crisis is over,’ he said. ‘While the impact [of the pandemic] will stay for a bit, the acute crisis is done.’
He believes the reopening trades that investors have been piling into, boosting beleaguered banks, energy, travel, and leisure stocks, will ‘continue to do well regardless of additional restrictions in Europe’.
Ross will be hoping his thesis is correct and that his trust can continue to benefit from his switch into value plays. In the six months to the end of January, Ross delivered a net asset value total return of 11%, outpacing the 9.3% gain from the benchmark FTSE World Europe ex UK index.
Over the past 12 months the NAV has climbed 42.7% and the share price has gained 45.8%, leaving the trust trading at a current discount of around 10%.
Flight to value
Ross (above), who took over the investment trust two years after the retirement of his predecessor Tim Stevenson, said the portfolio has been through some ‘abrupt change’ in the past six months. The closed-end fund benefited from exposure to ‘structural themes that were accelerated by the impact of Covid-19, such as gaming and online media, as well as ‘online facilitators’ like telecoms groups - Telecom Italia is his biggest position at 5.3% of the fund - and businesses that own mobile phone towers, such as French company Cellnex.
However, Ross became increasingly concerned about the valuations of growth companies and as investors continued to pile into gaming and online stocks he said ‘we did the opposite and as we entered the third quarter, we looked at where to take down our exposure’.
‘In September, October, and November we shifted into those [value] businesses and that singularly the most important thing we did in 2020,’ he said.
British Airways owner International Consolidated Airlines (IAG) was the first value addition to the portfolio. The stock has been hit hard by lockdown, bans on holiday, and restricted air travel.
‘We started looking at in March  when it initially fell because we felt at some point there will be an end to this environment, people will fly again,’ he said.
‘We came to the conclusion [in March] that it was far too early and the recovery potential was still too far off. As the year went on there was credible vaccine news…and as the first vaccines were approaching we started to feel more confident.’
Ross said he looked to New Zealand for a steer on what aviation recovery would be like and found ‘as soon as people were allowed to fly, they flew straight away – there was no long-term concern’.
He piled into IAG at the end of October when ‘the risk-reward was extremely competitive’ – between 30 October and 11 November the shares rallied 54%.
Ross also added CNH Industrial, an Italian tractor and truck business, as a reopening play. He said US farmers found themselves beneficiaries of a commodity price surge that encouraged them to invest so there was ‘a lot of pent-up demand coming through’.
He said CNH’s shares were ‘undervalued’ compared to US-listed counterparts.
Over and out
French media company Vivendi failed to make the grade and was cut from the portfolio after a strong run throughout the pandemic. The conglomerate owns majority stake in Universal Music Group (UMG), which Ross said was ‘the attraction’ of Vivendi.
‘We sold it because they are reducing exposure to the music business,’ he said. ‘It sold UMG to the Chinese who want to [float] the business probably in 2022 or late this year, and…we do not like the remaining [Vivendi] assets as much.’
IT consultancy group Atos was also dropped after it made an unwanted change to its strategic direction.
Ross said the firm had been keen to increase its exposure to cybersecurity that would benefit from increased home working but instead tried to acquire IT infrastructure group DXC Technology, a deal which later fell through.
Not only did Ross dislike the ‘high multiples’ being offered for DXC, he said IT infrastructure was a ‘low growth’ area.
‘It was a red flag for us: the company saying one thing and doing something different,’ he said.
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