Philip Wolstencroft has moved the Artemis European Growth fund into an overweight bank position even though he admits the sector caused the fund to underperform last year.
The manager says he is only buying higher quality bank stocks thrown up by SmartGarp, the quantitative screening tool used on the fund. However, he says the share prices of some banks in Europe could double as earnings are forecast to continue upward over the next five years.
In the first half of 2008 the portfolio was 5% overweight in banks and 5% overweight in industrials – two areas that Wolstencroft (pictured) says detracted from the fund’s performance as earnings estimates collapsed.
For the calendar year of 2008 the fund fell 40.08% compared with the IMA Europe excluding UK sector’s average fall of 24.69%. This ranked it 97th out of 99 funds, according to Morningstar.
“The longer-term performance of the [SmartGarp] strategy has worked well globally and in Europe but it has had its fair share of lousy periods,” says Wolstencroft. “During the Asian crisis the strategy didn’t have any traction and last year we had a few hiccups.”
He adds that for the beginning of 2008 earnings in banks and industrials were holding up well, valuations were good and the negative sentiment was in the contrarian manager’s favour. But earnings were wiped out and share prices were hit. K&S and Alpha Bank were among the poor performers.
Wolstencroft went underweight in banks but closed this again at the beginning of the year and has moved back to 2.1% overweight compared with the index, buying Société Générale, KBC and Dexia.
“Earnings are forecast to continue to go up in the next five years. If this is the case the share prices could double,” he says. “For the past year people have chosen not to believe that, but of late some have started to lose their pessimism and buy into the long-term story.
“No one is sure if the bottom has been reached but some of the bad news has been dissipated. People have been concerned that the recent rally means the businesses have stopped imploding and closed out their bearish positions.”
He adds that corporate bonds spreads have stopped widening, another reason his outlook on banks has been boosted.