Portfolio Talk: Crispin Murray
Europe has provided investors with excellent returns over the past three years. Philip Macalister asks BT Funds Management vice-president Crispin Murray if the good news story is over, or there is another chapter to the story.
Tuesday, April 6th 1999, 12:00AM
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PORTFOLIO TALK: Crispin Murray
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Description: Central philosophy of managers is to identify mispriced companies in Europe. BT says because of volatility it is recommended as a long term (5 year) investment. The fund invests in Western European shares, but it can extend to other European countries (including Eastern European countries), as suitable investment opportunities arise. |
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European hours, money and travel. These are the things which make up Crispin Murray's job of managing the BT Funds Management European equity fund out of Sydney.
Murray says managing European shares from half a world a way isn't too difficult these days as tools such as the Internet and video conferencing ensure company and economic information is readily available.
On top of this the managers undertake a busy programme of company visits. Murray says last year the team made more than 500 company contacts in Europe and normally someone is on the road.
"We are of a sufficient size that we are known in the market and companies like us," he says.
Even language isn't a problem. "English is the language of business now," Murray says. While a number of the eight people on the European team are fluent in foreign languages, Murray's not.
"I'm one of the failures on that front," he quips. Another of the good things, (besides the downunder lifestyle) is that the managers (Murray's an Englishman) are away from the Euro-bashing view adopted by some managers in the UK.
Murray says BT's approach of managing foreign funds from Australia is akin to that taken by American money managers. "A lot of US managers investing in Europe work out of backwater USA and they are doing very well."
Europe has been a good place to invest for some time now, is that still the case?
Yes, Europe's been a very good place to invest for over three years now and that's drawn a lot of attention to the market, so the questions then for us are: Is the story basically over and done with? Are we in a mature market with limited upside, or is there a new leg of the story going forward which still makes the market attractive? We would conclude that latter view.
Why has Europe performed so well?
Europe has been driven by a number of key factors. With the prospect of monetary union there was suddenly this great incentive for governments to crack down on their fiscal positions and restructure their own economies. It has allowed inflation to come down, governments now have low budget deficits, and they've got broadly neutral, slightly positive, current account deficits.
The macro economic environment is quite benin which is good for equities. We've seen a massive interest rate rally, and bond yields in Europe have come down to 3 per cent which has had a huge impact on stocks.
The rally (in stocks) has been interest rate driven, but that's coming to a close.
The second key issue in Europe has been the corporate restructuring story which is a replay of what we saw in the US in the 1980s.
The last issue is one of liquidity which relates back to the interest rate situation. Europeans have historically had quite a high savings rate, but their behaviour has been very conservative and favoured cash, and maybe bonds. The very high bill returns have disappeared and most people are aware in Europe that their Government super schemes are unfunded, so we've seen quite strong flows into equity mutual funds. Linked to that Europe has become a more interesting place for US funds to invest.
How much more is left of that?
What we are saying now is that we can look at Europe in a slightly different way and there are four global themes which are occurring in parallel, which are to some extent having their strongest impact on the European market. That is why we are still positive (on Europe) going forward.
The first two are the globalisation of industries and the impact of technology. More specific to Europe is the continentalisation of Europe and the domestic corporate restructuringwhich is going on. This continentalisation of Europe is effecting domestic businesses, and an extra dynamic is being added by technological advances.
The fourth key theme which will have profound implications is the ageing of the population.
All these things tend to have winners and losers.
Technology stocks have fueled the US market. Is it the same story in Europe?
It's been more across the board. Technology is now about 15 per cent of the US index, while it's 6 per cent in Europe. The US market has a lot of companies which have very low capital requirements such as technology and pharmaceutical. In a falling interest rate environment they perform well because their valuations grow quickly.
When people say they can't understand why the US market has gone up so much, they miss the point which is that the structure of the market has changed profoundly in the past 10 years. It is a growth market so when interest rates fall it should do well. The risk is that if interest rates stop falling and begin to rise valuations will have to come back.
Europe has been a broader market. There have been some companies which have had that element to it but I think its valuations are lower. The interesting thing is that you can get access to some of these investment opportunities much more cheaply (in Europe) with a slightly different twist. There are opportunities there which you can play in real companies rather than trying to find start up companies in the US. The technology story is playable in Europe but it's a different way of playing it.
The European story is no longer new and many more managers are targeting the area. How hard is it to find undiscovered value stocks in the market?
Yes, the market is becoming harder and harder because there are a lot of people analysing companies and the opportunities are becoming harder to find. We keep a broad mind and a consistency of approach in the way we look at the companies. The key things are understanding the business, getting out there and talking to (managers), customers and suppliers and doing research independently. That opens up a greater insight to the company.
We take a long term perspective, do a lot of due diligence and consider we are buying business itself rather than a piece of paper.
How many stocks do you keep in the portfolio?
We aim to hold between 40-50 stocks. The European market is quite fragmented and there's no stock that's more than 2 per cent of the index. If you have a very narrow portfolio your performance is not driven by the stock it's very much driven by more thematical country issues. We feel 40-50 is appropriate portfolio size. It's rare for us to run with a position of more than 10 per cent in a stock.
Do you run themes?
Everything is driven by individual stock analysis. You may see a theme emerge, such as telecoms, but that theme's driven by the analysis of the stock, not by a macro call.
Europe's a good news story at present. Are there any risks?
You can't go into Europe and rely on what companies tell you. A good example is what happened to Alcatel. They promised a lot of restructuring and improvements, but things didn't go to plan and there were more problems than they thought so the company underperformed.
Europe can be quite volatile too and that's a function of the structure of the market. Liquidity is not as good as the US market and it doesn't have a stable retail stream. There are a lot of short term players in the market and they can just dump their position in a stock thus impacting on its price. While that's a risk it also creates opportunities.
Research house IPAC Securities has put this fund on hold as the manager, BT Funds Management, is for sale. Fellow researcher FPG Research has downgraded BT from a five star to a four star manager.
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