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European equity star Darwall: winners and losers have never been clearer

European equity star Darwall: winners and losers have never been clearer

Citywire AA-rated Alexander Darwall believes that the US shale gas boom is leading to the United States moving away from a protectionist model to a more free trade one as it reaps the benefits of the cheap energy source on its doorstep.

At the same time the manager of the Jupiter JGF European Growth fund is wary over signs that China is moving towards a more protectionist and nationalistic agenda which will be detrimental to European companies trying to operate there.

Darwall said: ‘The US has been one of the most protectionist countries in the world but it has moved away from that due to the shale oil and gas boom.  This is a big positive for companies in our portfolio such as Intertek, Bureau Veritas and DnB Nor.’

He thinks a major threat to his holdings would be if Europe followed suit to become more protectionist.

‘That would be a big problem but I believe Europe has some of the best services technology in the world and a trading and culture mindset second to none.'

Darwall is buoyed by continuing globalisation at a time of great change and says it is becoming ever clearer which companies will succeed and which will not.

‘As never before we are seeing the winners and losers in this environment. Those getting it right are doing very well at a time when many companies are going under water.’

While he is continuing to avoid most banks, Darwall is finding selective opportunities within the broader financials sector, and he continues to avoid commodity stocks.

‘Understanding the super macro is the bedrock of how we pick the fund holdings and we are very weak on short term trading. We don’t like financials because transparency is poor and it is hard to differentiate between them.'

‘Mainstream banks have become glorified utilities and the play things of politicians but our financials weighting outside of the mainstream is slightly fuller than usual.’

In terms of commodity stocks, Darwall thinks they are vulnerable to fluctuations in currency which leaves them unable to control their own costs.

Darwall has recently been adding to media firm Reed Elsevier (6% of the fund) as the company meets a number of his investment criteria, while another core position in German kidney dialysis specialist Fresenius  (6.3% of the fund) has also been increased.

'Reed meets my criteria of being well embedded with its customers and having significant points of differentiation [from its peers]. This is extremely important as it has the means to demonstrate value and monetise itself.’

‘Having spent some time with Fresenius recently, I believe it is still significantly undervalued by the market.’

As a famously low turnover manager, Darwall says he has 12 stocks that have been with him for at least the last five years while around one in 10 is sold each year.

‘On average I make two or three significant mistakes every year and about one in 10 is sold because I got the [investment case] wrong.'

Darwall does not tend to differentiate between large and mid-caps although he believes that ‘sometimes the largest companies can lose their focus.’

He admits that opportunities to invest in countries in peripheral Europe are still quite limited, although he shows his unconstrained approach by revealing that his best performing stock of last year was Spanish online ticketing group Amadeus.

While he is keeping a watchful eye on the overall valuations of the 40 stocks in the €2.3 billion portfolio, Darwall is comfortable that everything in the fund deserves its current valuation.

‘I’m very attuned to valuations but make sure I know so much about that company so that I can always make an informed view on valuations.  We have examples of companies in the portfolio where the share price has gone up but they look cheaper than they did.’

One such example is the fund’s largest holding Novo Nordisk the diabetes specialist, which Darwall believes to be undervalued despite a strong run over the last three years.

He told Citywire Global last month: ‘Novo Nordisk has always looked expensive but we see it as a "cheaper" stock now than a couple of years ago, even if the stock price has more than doubled since 2009.

‘The stock is now trading at 25x earnings but it was already trading at more than 30x when I bought it 12 years ago and has been above 15x for most of the past decade. In the meantime the share price has risen by approximately 600%.'

In the Equity Europe sector covered by Citywire's analysis, the fund has returned 54.4% over three years to the end of February. This comapres to the average manager's return of 22% over the same period.

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