Alexander has now been working on the FF European Growth Fund for two quarters (Q4 2006 and Q1 2007), initially in conjunction with Graham Clapp and then, since January 2007, with sole responsibility. Over these two quarters, the fund has beaten its benchmark returning 10.9% versus the benchmark return of 10.1%, and produced a second-quartile ranking within its peer group. The two quarters have shown marked difference in character with the fourth quarter generating absolute performance of 7.9% as the market rebounded from its set back in May 2006. The first quarter of this year, however, has been characterised by much greater volatility, stemming from worries over the US and Chinese economies and, in particular, fears about the sub-prime market in the US.
Higher Concentration on Certain Stocks
In response to this volatility through the first quarter, Alexander has exploited the opportunity to restructure the portfolio more aggressively via limit orders to exploit the market moves. In particular, the number of names in the portfolio has been reduced in line with Alexander´s intention to increase the fund´s concentration, with the number of names falling from 215 in early October to 185 in December and 156 by the end of March. In his own words, Alexander now feels he has succeeded in putting behind him the more difficult half of the fund´s restructuring.
The Strategy in Particular
As we enter the second quarter of this year, Alexander´s focus is now to concentrate the fund´s holdings in his best ideas. Some of these, for example Swatch and Fiat, have already registered strong performance in the beginning of the year; this highlights the success of his thesis. Alexander scours the entire marketplace to find the best opportunities that fall into one of the following categories: cross-industry valuation anomalies; unappreciated growth; recovery or turnaround situations; structural industry changes; franchise value or duration plays; and where the market valuation is below the replacement value. Alexander now wants to increase the concentration of the fund in these and other preferred names to generate greater total outperformance, by increasing the fund´s concentration in line with his stock-specific conviction.Other elements of the fund´s restructuring have involved decreasing the exposure to emerging markets and decreasing sector weights so as to reduce the fund´s non-diversified risk. This means that more of the fund´s performance should be a result of stockpicking rather than broader macro/sector views that can generate higher volatility in performance.
Germany is Performance Driver
In terms of current fund positioning, Alexander continues to focus on stock ideas that stand to benefit from the economic improvement across Europe and in particular Germany. This method is driven by bottom-up stock selection but is supported by the top-down trends being observed across Europe, where, in particular, falling levels of unemployment in Germany are starting to lead to improving signs of consumer confidence and higher economic growth, which is impacting surrounding geographies.
Finally regarding Alexander´s day-to-day management of the FF European Growth Fund, he is being assisted by two analysts who have been promoted to assistant portfolio management positions. These two, promoted from among the best of the research team, are working with Alexander on a mix of waterfront fundamental research, as well as assisting him in monitoring the fund from both technical and quantitative perspectives.
