Performance Review 2006
Laurent Dobler (lead manager), Arnaud Cosserat: "The European stock markets registered an excellent performance in 2006. The exceptionally strong economic situation with uninterrupted worldwide economic growth of more than 4% for nearly four years running led to a new wave of 2006 earnings revisions for European companies. The market development was also supported by strong takeover activity. The portfolio companies of Comgest Europe benefited from their sustainable growth perspectives. The regularity of their long-term economic performance goes unnoticed when all quoted companies are firing on all cylinders, as has been the case over the last four years. However, as soon as some doubts emerge, as witnessed in the spring of 2006, the security offered by the steady earnings growth of the companies in Comgest Europe comes to the fore. This was exemplified by the fact that the market fall was double that of your portfolio in the April to June correction. In addition, the Fund’s volatility is very low, constantly 20-25% lower than that of its reference index, reflecting the quality and visibility of the stocks held. Comgest Europe’s relative performance was negatively affected by strong weighting of health care stocks in the portfolio and the absence of financials; however, this allocation effect was compensated by strong stock selection in consumer discretionary, consumer staples and health care."
Performance Review 2007
Laurent Dobler (lead manager), Arnaud Cosserat: "In 2007, the cyclical earnings growth, the scale and vigour of which remained extraordinary for four years, suddenly came up against the wall of financial crisis. The liquidity crisis brought takeover activity to an abrupt halt and the risk of financial contagion brought about a cautious stance of investors. For listed companies, 2007 was a year of inflexion: for the first time since 2002, analysts revised their estimates of European corporate earnings downwards for 2007. Strong growth having become a rarer commodity, the sustainable growth companies which make up the Comgest Europe portfolio attracted more interest during the course of the year. Comgest Europe’s relative performance benefited from not holding any financials and its holdings of resilient consumer staples companies, but negative allocation effects came from the strong position in health care and the absence of materials stocks."
Performance Review 2008
Laurent Dobler (lead manager), Arnaud Cosserat: "2008 enabled Comgest Europe’s quality growth stocks to start differentiating themselves from the market, which is no surprise within the context of a cyclical slowdown. The last cycle was unusually long and intense, but the nature of the crisis abruptly changed following the collapse of LEHMAN BROTHERS. Tighter access to credit squeezed indebted consumers, forcing the world´s main economies to the brink of depression. Comgest Europe’s portfolio holdings proved to be much more resilient than the market. Without changing its strict quality growth criteria; the fund took advantage of the volatility offered by market nervousness to build positions in excellent firms at bargain prices. Against a background of a deep and widespread credit crisis, the sustainability of earnings growth within the portfolio attracted the attention of investors looking for visibility, dynamism and transparency. Comgest Europe held no financials but had a large position in the health care and consumer staples sectors, which helped performance; also positive stock selection consumer discretionary and industrials contributed."
Performance Review 2009
Franz Weis (lead manager), Laurent Dobler, Teresa Watkins: "In 2009, the European markets started very weak, losing 20%, compared to a loss of only 10% for Comgest Europe. Markets then moved from deep depression to total euphoria. After having envisaged a crisis of an intensity resembling that of the 1930’s, the markets regained confidence and started to anticipate a V-shaped recovery. Global growth fuelled by various stimulus plans, especially in China, kick-started the economy. During this phase, Comgest Europe, which holds no cyclical or financial stocks, lost all gains realised since the start of the year. From July onwards, Comgest Europe’s companies and those of the market moved upwards at the same pace. Comgest Europe saw a negative impact on its relative performance from the absence of financial stocks and the strong positions in the health care, information technology and materials sectors. Positive contributions came from stock selection in health care and utilities and the small exposure to the telecommunication sector. "
Performance Review 2010
Franz Weis (lead manager), Laurent Dobler, Teresa Watkins: "Despite a return to economic growth in 2010, European investors remained unconvinced about the sustainability of the economic recovery, spooked by the fragility of the banking sector, mounting public debt and the continuous slide of the US housing sector. The accommodative monetary policy fuelled growth, but also a revival of inflation in emerging countries. This two-tier world, deflating developed countries on one side and inflating emerging countries on the other, started to feed another equity market fad: a dichotomy between “emerging market plays” and non-emerging market companies. Comgest Europe’s positive performance was driven by the earnings growth of its holdings in the consumer discretionary and consumer staples sectors; moreover, not holding financials helped."
Performance 2011 - Year-to-Date
Franz Weis (lead manager), Laurent Dobler, Teresa Watkins: "The European equity markets remained subject to significant fluctuations and the macroeconomic outlook remains clouded. The Greek debt crisis continued to raise systemic issues. On top of this uncertainty, the global economy appeared to be slowing down. New economies faced serious inflationary risks and needed to raise their interest rates, while developed countries were still in a deleveraging phase which is bound to have a long-term impact on their private and public spending and, ultimately, their growth rates. This climate of restricted growth proved favourable for the long-term growth companies in Comgest Europe. Performance was helped by the robust fundamental trends reported by the fund’s selected stocks in consumer staples, consumer discretionary and health care, but also in materials and telecommunication."
Performance since 2006
Franz Weis, Arnaud Cosserat, Laurent Dobler, Teresa Watkins: "Over the last 5 years, the European companies suffered badly from the bursting of the financial bubble and the ensuing credit crunch and recession. Even if they have strongly recovered, European corporate earnings are still substantially below previous peak levels. In contrast, Comgest Europe’s portfolio companies managed, on aggregate, to increase their profits even during the recent crisis and have now returned to their usual, above-average rate of growth, thanks to their strong market positions, barriers to entry, innovation power and positioning in growth markets. Comgest Europe’s performance reflects the resilient and dynamic fundamental development of the carefully selected quality growth companies in which it has invested."
Investment Process and Strategy – How does the Fund Manager invest?
Franz Weis (lead manager), Laurent Dobler, Teresa Watkins: "We believe that over the long term, superior returns are generated by the stock price appreciation of companies that can sustain above-average earnings growth for an extended period of time. To find such companies, we apply our strict quality criteria, which include earnings visibility, exceptional business franchises, low cyclicality, high returns on equity, sustainable profit margins and self-financing capabilities. Our disciplined process allows us to identify those companies which can achieve above-average returns at below-average levels of risk over the long term.
We feel valuation discipline is very important as we do not like to overpay for high quality companies. We are willing to be patient, sometimes for many years, to ensure that our estimated appreciation potential can be realised.
Our investment philosophy has never changed. We have only worked at improving and sharpening our strategy, becoming more and more selective as the depth and breadth of the company coverage has increased and applying lessons learned over the years.
bottom-up investment approach
Our primary source of alpha is stock picking. As conviction managers, we have an intimate knowledge of the companies in which we invest: portfolio managers dedicate the majority of their time to researching and defending their investment thesis for the holdings in their portfolios. Our rigorous investment approach results in selecting companies that meet our strict quality criteria.
The Comgest style is best characterised as ‘Quality GARP’. We have taken the traditional GARP approach and overlaid it with a focus on high quality companies, which is defined by our strict quality criteria. In addition, our style is characterised as ‘unconstrained’; portfolios are not managed strictly against a given benchmark. Tracking error is usually above-average.
Main characteristics
Disciplined and consistent focus: our singular management objective is to obtain above-average returns with lower volatility than that of a given benchmark over the long term.
Portfolio turnover: the average holding period is 3-5 years.
Intimate knowledge of companies: applying our strict quality criteria results in a small investment universe. Consequently, this allows analysts to have a small research coverage list; on average 10-15 companies/analyst. Additionally, we maintain long term relationships with management teams, in many cases for more than a decade.
Concentrated portfolios: we tend to have high conviction in a limited number of stocks; the top ten holdings typically have 3-5% weightings.
Strict investment criteria: to enter the Comgest investment universe, companies must satisfy demanding qualitative and quantitative criteria, concerning profitability, and financial health, the strength of the business franchise, barriers to entry, pricing power, and the business model’s transparency and visibility.
Focus on corporate governance: this important extra-financial criteria is carefully evaluated to ensure the highest possible standards are practiced by companies in our portfolio.
There are 25 to 30 stocks in a typical European portfolio. We believe that this number of stocks is enough to meet diversification criteria.
Price plays an important role in our strategy as we seek to invest in quality and growth, but only at a reasonable price. The appreciation potential of selected companies is derived from the valuation carried out, as described above, and the evaluation of the growth outlook and the risks attached.
The intensive research, in-depth knowledge and long-term focus naturally results in portfolios with relatively high concentrations and low turnovers. Subject to significant changes in the business environment, changes in management or wholesale changes in the business strategy of the company, once a company enters the investment universe it tends to stay there for quite some time and (subject to valuations) also stays in portfolios for some time. Average portfolio turnover has been 25% to 30% per year."
Investment Outlook
Franz Weis (lead manager), Laurent Dobler, Teresa Watkins: "Whilst the economies of the developed world returned to growth after the financial and economic crisis of 2008/2009, the level of sovereign and household debt and the still precarious state of the banking sector continue to overshadow the market outlook. Corporate profitability has recovered, but the difficult macro environment, higher input costs and the strong Euro make consensus expectations for record operating margins look challenging. By contrast, the quality growth companies in which Comgest Europe is invested will continue to deliver reliable and dynamic earnings growth, qualities which may increasingly attract attention in the current stock market environment."
