There are just two words that explain the phenomenal outperformance enjoyed by veteran European fund manager Rory Powe, who runs the Man GLG Continental European Growth fund: pricing power.
Over the past year the fund has been the single best performer of the 100 in its sector. Over three years it is also in the absolute number one position. It is a ranking virtually no other fund manager in any sector enjoys at the moment.
Powe has managed to generate a return of nearly 25 per cent over the past 12 months when the average fund is up just 3.7 per cent. The key, he says, has been to buy stocks that can maintain and raise prices and profitability when disinflation is everywhere.
He also reckons that it is going to be virtually impossible to obtain these sorts of ret-urns in 2016. But Powe is no stranger to shooting the lights out one year and then seeing something of a downturn.
Between 1991 and 2001 he ran Invesco Perpetual’s European unit trust, taking it from £300m to £3.3bn at its peak. He turned £1,000 in 1991 into more than £4,300 10 years later, but he was punished badly by the bursting of the tech bubble, with the fund falling 52 per cent in a year and slipping to the bottom of the rankings.
He later left to set up his own hedge fund, only to return to mainstream fund management in July 2014, joining Man GLG to run a long-only European fund.
Powe reckons Europe’s economic recovery is “hesitant and fragile”. He is also less than confident about corporate earnings.
With inflation so low, companies “lack revenue traction. Q3 2015 saw more earnings downgrades than upgrades. I’m very cautious about the global economy and inflation. I think the ECB is going to have a battle on its hands getting inflation up to 2 per cent. There will have to be more QE. We live in a return-shrinking world,” he says.
So what does a fund manager do against this backdrop? Invest in companies with competitive strength, market leadership and pricing power, says Powe, and those companies that can capitalise on that position over the next five years, even if that means you have to pay quite a lot for them.
There are thousands of stocks Powe could invest in, but only about 300 he is interested in. “I have been covering the region for 30 years and have built up a list of names that loosely meet my criteria,” he says. He whittles this down to just 30 to 40 for the portfolio. He currently has 33 holdings, and when he wants to buy a new stock it means he slings another one out. There is no long tail of stocks where he has low conviction.
When he took over the fund in July 2014 it had more than 200 stocks. In just three days he liquidated the lot and it is testament to his outperformance that even with the cost of such a portfolio reconstruction it remains top of the table over three years. Now he aims to hold stocks for five years, although average turnover is around one-third of the portfolio every year.
His long career in European fund management has taught him to fall out of love with stocks as well. “I’ve learnt quite a few lessons in terms of holding names for too long or getting too comfortable with them,” he says. “You have to be vigilant, that their competitive situation remains strong and that management is not guilty of deviating from their core competence.”
CV: Rory Powe is fund manager of the Man GLG Continental European Growth fund. Powe joined Man GLG in July 2014 to work on the Continental European Growth fund. He came from Powe Capital Management, which he founded in 2001, running European funds. Previously Powe was at Invesco running its continental European strategy for 10 years. He has a degree from Oxford University.
The stock he loves most is Pandora, a Danish jewellery stock, which is 7.5 per cent of the fund. It may seem odd that three decades in European fund management takes Powe to a company that makes mid-market charms and rings, typically selling for around £45 a piece. But before you scoff, look at its share price. It has been on an almost straight line up since mid 2012, from 52 Dkr to 829 Dkr today. Revenue growth at Pandora has been around 40 per cent a year. It is a designer and manufacturer of jewellery, expanding more recently into its own Pandora-branded stores. It now has 1,780 across the world and is expanding rapidly in China.
Powe’s ready for the obvious question: that Pandora is a fashion fad that could fizzle down as quickly as it has shot up. “What reassures me is that charms make up 70 per cent of their business. But now they are going into rings and earrings.” It’s a brand, he feels, that can maintain pricing power and expand at the same time.
Geberit is another of his favoured stocks, although its share price performance is far less dazzling. It’s a Swiss maker of plumbing products and has had a tough time as the Swiss franc has soared. Powe is buying into weakness in the stock.
Last year what propelled the fund most was one of the mundane realities of portfolio management. No one stock did amazingly well. Instead what Powe managed to do was to have hardly any duffers. “We had an unusually low number of mistakes,” he says, partly because he had zero exposure to energy, resources and banks.
This year will be tough, but if investors stick with stocks with pricing power they will be rewarded, he says. He has grown the fund to £300m in size from £60m when he took over, and must be confident that with such a remarkable track record, the money will continue to pour in this year.
Size of the Man GLG Continental European Growth fund when Powe took over
Number of holdings in the portfolio
Portion of the fund in jewellery maker Pandora
Return of the fund over the past 12 months
Size of the Invesco Perpetual European unit trust at its peak when Powe was running it
Number of stocks Powe is interested in investing in