Performance Review 2006Barry Norris: "The fund outperformed its benchmark due to strong stock selection. Quarter one in particular saw strong returns from stocks as diverse as steel tubing, salmon fisheries and financials. Quarter four saw strong performance from utilities and property holdings as well as stock specific mergers in the oils sector."
Performance Review 2007
Barry Norris: "The fund underperformed its benchmark in the first half of 2007 due to defensive positioning. The second half of 2007 saw the fund outperform its peer group benefiting from its stocks which had previously been held back due to rising global interest rates."
Performance Review 2008
Barry Norris: "The fund again outperformed its benchmarks. The first half of the year the fund took advantage of the rising commodity prices, whilst initially impacted by the sell off in the early part of the third quarter, the manager quickly repositioned the fund towards the blue chip defensives which aided relative performance throughout quarter four."
Performance Review 2009
Barry Norris: "The fund again outperformed its benchmark. Positive contributions coming from Defensive sectors, positions in Valeo and Randstead as well as being overweight in Ireland whilst being overweight in Materials proved detrimental."
Performance Review 2010
Barry Norris: "The Fund outperformed its benchmark in 6 out of 12 months. Positive contributions came from Stora Enzo and Prosieben. The funds unwillingness to invest in the banking sector held back performance in July, however, this subsequently proved beneficial, adding to performance from August onwards."
Performance since 2006
Please refer above for commentary covering the period 2006-2010.
Investment Process and Strategy – How does the Fund Manager Invest?
Barry Norris: "Argonaut follow a multi-cap style that seeks to identify up to 50 best ideas from a broad universe of Pan-European stocks with a typical liquidity constraint of market capitalisation of €500m. The investment style is to look for relative earnings surprise: stocks whose earnings revisions are likely to be better than the market and to assess valuations in the light of these likely earnings revisions.
The managers review the historic earnings power of companies and compare this with future expectations. When, for example, future expectations of profitability are lower than average profitability over the economic cycle this could be an indicator that the earnings power of the company is higher than the market appreciates and these stocks could be attractive. When, for example, future expectations of profitability are higher than average profitability over the economic cycle this could equally be an indicator that the earnings power of the company is lower than the market thinks and those stocks would be avoided.
Argonaut will also have a view of where economies are in terms of the economic cycle and will tend to look for more operationally and financially geared companies when expectations of economic growth is too low and less operationally and financially geared companies when expectations of economic growth are too high.
Since the portfolio is comprised of up to 50 individual stock selections, the overall portfolio cannot be said necessarily to have an individual style, but will reflect where we believe the best opportunities are at stock level.
Argonaut’s investment philosophy is built on two key beliefs. The first is that share prices are driven by earnings and expectations of future earnings. The second principle is that economic activity is cyclical, and that when economies are expanding, companies whose profits are more sensitive to growth do better, and in an economic slowdown the reverse is true.
Although economic cycles tend to be similar in many ways, there is always a twist. Often industries which have been in the doldrums for a period of time get starved of capital and fail to expand production. If demand for products in these industries picks up (often unexpectedly) the industry often finds itself unable to meet demand. Consequently prices for goods rise, and companies are able to make supernormal profit margins. As a consequence, valuations for companies within these sectors can rise quite dramatically, reflecting surprisingly good growth prospects. These sectors will often lead a new bull market for stocks.
On the other hand, booms always turn to bust eventually. Often capital can be made too readily from investors or banks who have been told a “good story” and have overestimated the growth potential of an industry. This leads to production expanding at a much faster pace than demand and consequently a loss of pricing power within the industry. Consequently company profit margins fall (often unexpectedly) and this leads to a contraction in valuations paid for stocks. Often these sectors will start a bear market for stocks.
These factors explain why new bull markets tend to be led by different sectors and no one industry performs well all of the time. Of course, this is what we would intuitively expect – there is no reason why any sector should outperform for the very long term.
The global capital cycle
Argonaut believes that within this framework stocks and sectors with different attributes are likely to do better than others at different points of the economic cycle.
Assessing the sensitivity of stocks to the economic cycle is therefore crucial. This can be boiled down to two crucial factors: operational gearing (the volatility of profit margins to sales growth) and financial gearing (how indebted the company is).
In the good times, operational and financial gearing is a positive for profits. In the bad times, it can be fatal. Argonaut’s stock selection process is influenced by where in the market cycle the global economy is positioned."
Barry Norris: "We have turned more cautious. Equities are still cheap but economic growth expectations have now probably peaked and corporate earnings are unlikely to surprise from here relative to expectations. For the first time in two years we are overweight “defensive” sectors, believing that they offer compelling opportunities given their predictability of earnings, apparent unpopularity and cheapness relative to other asset classes."