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In a recent webinar, Funds Europe spoke to Chris Hart, portfolio manager of the Robeco Boston Partners Global Premium Equities Fund, about how he seeks to tap into global opportunities from a value and growth perspective.
‘Buy low, sell high’ is a universally accepted and understood investment doctrine. However, a failure to properly comprehend value means investors can lose out. Since its launch in December 2004, the Global Premium Equities Fund has cemented a reputation for identifying both unacknowledged value and unrecognized overpricing.
This success is reflected in the fund’s consistent outperformance of the MSCI World Index, and its universally high ratings among research firms. In 2014, it was the only equity fund to win nine Morningstar awards in Europe. Fundamental to the fund’s success is its ‘three circles’ philosophy; the three circles being valuation, business fundamentals and business momentum.
When Chris Hart took over management of the fund in 2008, he removed constraints that the previous portfolio manager had abided by and shifted the emphasis to finding stocks that fit the three circles philosophy, no matter the region, market capitalization or sector. He states the blending of these three characteristics results in a consistent return profile.
We ask three questions
“When we assess a company, we ask three questions: does it offer an inexpensive valuation, does it exhibit strong earnings momentum, and does it achieve high levels of return on employed assets?” he says. “The valuation lens is always the first hurdle for us, and the characteristic we are most sensitive to. We aim to find stocks with share prices which do not reflect the real underlying value of the business.”
Another key consideration is the momentum of the business: simply put, is it getting better, staying the same or getting worse? This piece of the philosophy, Hart comments, helps prevent investments in value traps – good businesses with low valuations and no reason to appreciate. Instead, “we want companies that are performing well quarter to quarter and have an identifiable catalyst to help it reach the target price we set for it,” he says. “If the price of a stock you hold gets cut in half, you’ll need a 100% return to recoup that lost capital – a company needs to be capable of achieving this, or it doesn’t make it into our portfolio.”
“Having a sustainable cash flow is an important element – and also important is what a company does with its cash. Hart favors stocks that use capital in a shareholder-friendly manner – such as buying back shares and increasing dividends – and to positively grow their business, whether organically or through acquisition.
The fund’s portfolio is generally comprised of around 100 stocks to ensure diversification. Stocks from any sector, industry, region or country can be considered for investment. There are some conditions in respect of capitalization, but the fund is even malleable in this regard.
“Names of USD 1 billion and upwards are our real sweet spot from a liquidity perspective, but we will look at small-caps down to a few USD 100 million in size,” Hart explains. He is keen to stress that no macro overlay of any kind figures in the fund’s analyses. The selection process is resolutely bottom-up and unconstrained – its sole raison d’être is to find and purchase undervalued quality stocks, identify the point at which they reach their full market value, and sell when that time comes.
The truly dispassionate nature of the fund’s selection method is evidenced in its regional weightings over time. Since launch, US exposure has ranged from 40% to 61%, Europe 12% to 40%, the UK 8% to 22%. These weightings have frequently deviated from the MSCI World Index’s own.
‘There was an expectation the rising tide of QE would raise all boats, but this hasn’t happened’
Currently, Hart sees little missed value in Europe, contrary to growing investor interest in the continent. Spain and Italy may be slowly recovering, but the fund makes no differentiation between countries, only stocks. “Europe’s largest companies look fully priced, but there are opportunities in the small to mid-cap area. We currently have some exposure to insurance companies there, as they continue to deliver capital,” he says.
“There was an expectation the rising tide of QE [quantitative easing] would raise all boats, but this hasn’t happened – and the recent announcement of more is an indication the policy isn’t working as they expected. There have been individual stock-level improvements, but overall little progress.” Despite this, some areas of the world map are off-limits, at least for the time being – Russian stocks, for instance, are currently “uninvestable” from the ‘three circles’ perspective.
Contrarian, or contrary?
The three circles approach has produced a portfolio some may find surprising. For instance, Apple is the fund’s largest holding, which might seem at odds with Hart’s stated aim of only purchasing inexpensive stocks. “When we piece the three circles together, Apple really exemplifies an area of mispricing – it exhibits strong underlying fundamentals, with expanding and stable margins, supportive free cash flow levels, and growth rates vary from high single to low double digits,” Hart says.
“Its free cash flows and growth rates are higher than the market, so we see a disconnect between the company’s valuation and its fundamentals.” When Apple will reach its target price remains to be seen.
‘When a sector’s out of favor, often there are many well-run companies painted in a very broad-brush manner’
An example of a recently jettisoned stock cited by Hart is Japanese commercial kitchen equipment manufacturer Hoshizaki. “We purchased the stock in Q4 of 2014 and it took a sizeable position in our portfolio. It performed extremely well and we sold when it hit full value in Q3 this year,” Hart says. A look at the fund’s portfolio on a sector basis demonstrates the fund’s ability to deliver significant returns from contrarian plays.
Comparing the fund’s returns from sector areas with the MSCI World Index shows sizeable disparities. “It’s a hallmark of mispriced securities. When a sector’s out of favor, often there are many well-run companies painted in a very broad-brush manner, which produces that valuation disconnect we look for,” Hart says. The fund had assets under management of EUR 2.2 billion (at the end of November 2015) and has consistently outperformed its benchmark over the last five years through a range of market environments.
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