Performance Review 2005
Nelly Davies: "During 2005, HSBC GIF Euroland Equity strongly outperformed the benchmark and was ranked 15 out of the 105 funds in the S&P Euroland Equity offshore category.
In this environment, our Profitability and Valuation approach did well with the exception of the second quarter due to exceptionally positive earnings revisions in the energy and materials sectors where the fund’s exposure was low.
The fund started to really outperform in the 3rd quarter, when energy stocks started to lose momentum and our stock picks, especially in industrials and insurance fared well.
The top 15 stock contributors added 5% to the relative performance of the representative fund versus the benchmark while the bottom 15 stock contributors subtracted 3% from relative performance."
Performance Review 2006
Nelly Davies: "Strong stock selection was offset by a negative impact from sector exposure.
As a residual of our stock selection approach, sector positioning dampened returns. Our only real beneficial sector position was our relatively low exposure to the energy sector.
The biggest single negative factor was our low exposure to utility companies. After performing well for three years in a row, utility stocks were expensive according to models in 2006, but consolidation and speculation pushed valuation even further.
Our second biggest negative factor was technology stocks. After nearly four years of underinvestment in technology, corporates appeared to be opening their wallets again. This did not materialise in Europe as it did in the US. Technology stocks posted almost flat returns in 2006 in the euro zone, but did relatively well in the US Market (+9%). We were also slightly overexposed to pharmaceuticals, which underperformed yet again in 2006. Finally, we were underexposed both to Automobiles and Components and Banks, both of which surged by 32% and 25% respectively.
Performance Review 2007
Nelly Davies / Frederic Leguay: "In 2007, stock selection emerged by far as the main performance contributor. Performance attribution indicates that 97% of the total out performance was generated by stock selection compared to just 3% for the resulting sector exposure residual. The sectors where stock selection was especially strong are Capital Goods, Healthcare Equipment, Software and Services, Technology Hardware and Pharmaceuticals.
This was also a year in which a ROE/Price to Book - Profitability and Valuation model performed in line with the market. Thus, the team’s fundamental research approach was critical, particularly in terms of selecting companies on the basis of profitability scenarios. Our focus on specific profitability factors, namely earnings quality, (cash portion of earnings) and leverage, helped us to navigate through a deteriorating environment for profitability as a whole."
Performance Review 2008
Frederic Leguay: "The out performance of the strategy is mainly due to the positions taken on stocks with more stable profitability profiles. At the same time, the value bias of the strategy partly penalised the performance. Although our strategy remained relatively defensive, we gradually took positions on some transitory profitability companies because the valuation discount to growth stocks started to widen. This also included selected financials in the second half of the year which we had previously avoided. Therefore, most of the out performance occurred earlier on in the year. In terms of stock selection, our absence from Volkswagen was the most costly contributor over the year."
Performance Review 2009
Frederic Leguay: "The strategy posted strong returns in 2009. The stock selection effect was very strong and compensated for unfavorable sector positioning, mainly an underweight exposure to strong performing cyclicals (Banks, Capital Goods, Materials). Outperformance was strong due to increased exposure to transitory profitability companies in 2008 with a view that distressed valuations were being driven by sentiment and not fundamentals. The strategy benefited from having invested in companies standing to benefit from economic normalization. By end of the year, the exposure to the transitory segment diminished somewhat, but these continued to be the biggest contributors to performance but more so in the industrial space than in the financials, which gave back some of their gains after performing very strongly in the 2nd and 3rd quarters."
Performance Review 2010 - Year-to-Date
Frederic Leguay: "The gross relative performance remains positive in 2010 in a market environment that has prioritized quality and earnings momentum and that has been impacted by a sudden return of geographic effect. At end July, the Euroland Equity fund was 1% above the benchmark YTD : while modest compared to 2009, the performance was resilient in the face of very tough period for value oriented strategies. The team’s shift into higher profitability companies during 2010 is one explanation and the other is that selected stocks outperformed their peers on average in both cyclical and non cyclical categories, especially in financials and industrials."
Performance since 2005
Nelly Davies (until April 2007) / Frederic Leguay (since May 2007): "To summarise, the gross (net of fees) outperformance of the strategy over the last 5.5 years has been about 3.5% per year. Most of this outperformance is derived from the stock selection skills of the portfolio management team and not from the pure quantitative implementation of the profitability and valuation strategy which outperformed by only 0.12% per year on average over the last 5 years. The main reason for this was the underperformance of the “Quantitative implementation” in 2008 when buying company companies at their cyclical peaks in terms of profitability would not have been a good idea. That is why it is important to have experienced investment professionals who are able to determine normalised profitability levels over the economic cycle and pick stocks accordingly."
Investment Process and Strategy – How does the Fund Manager invest?
Strategy
European Equity strategy is an active and fundamentally managed strategy that invests in European companies with stable or improving profitability that trade at attractive valuations, through a rigorous bottom-up stock selection process.
There are two elements that distinguish our approach:
• Our distinctive Profitability and Valuation approach that is based on a simple investment idea studied through academic research and internal studies that was back-tested and analysed across different market conditions and that has shown exceptional track-record;
• The way we translate this original investment approach into concentrated portfolios which enables us to translate stock selection into strong performing portfolios: small empowered portfolio management team committed to outperformance that has demonstrated their ability to add value in all market conditions.
