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It all boils down to the stock

Having been hotly tipped as the sector to hold in 2001, Europe has put in a relatively poor display since the turn of the year.

Over the past three months, the average European unit trust has returned 6 per cent while, over the past year, the average return is down by more than 15 per cent. Nevertheless, the European fund managers remain genuinely optimistic. The latest message to emerge from the European equities desks is that managing money in Europe is totally different to how it was 10 or 20 years ago but, for those with the ability to stockpick, the opportunities to outperform are still abundant.

Credit Suisse Asset Man-agement director of European equities Raj Shant says: “During the mid 1980s, the returns you made from a stock relied on the country it was based in. Sectors had started to matter but they mattered less.

“Today, companies grow by stealing market share – stealing someone else&#39s lunch. So picking the winners is the way to outperform. Sectors are still important but if you pick the wrong stock in the right sector, you will still underperform.”

Shant, who is the lead manager of CSAM&#39s European unit trust, points to the Euro-pean telecoms market to illustrate his argument.

In the first quarter of 1999, Nokia held 31.2 per cent of the telecoms market while Motorola held 17.8 per cent and Ericsson held 11.2 per cent. By the first quarter of this year, however, Nokia had increased its market share to 40.2 per cent at the expense of the other two. Motorola&#39s share was down to 14.1 per cent while Eric-sson&#39s was 7.2 per cent.

Shant says the Nokia case dramatically shows the difference between picking the right and the wrong stock rather than picking the sector as a whole. In building his portfolio, he now says stockpicking makes up 50 per cent of the investment decision, while sector accounts for 30 per cent, and country only 20 per cent.

He also points to the banking and software industries for similar examples. French Bank BNP has made returns of 11.2 per cent for the year to date while Swedish Bank Nordea has seen its returns fall by 12.6 per cent over the same period. In the software sector, most have made negative returns over the year to date while German software provider SAP Pref has made a positive return of 14.4 per cent.

ABN Amro Asset Manage-ment is another house which believes the importance of country has diminished alth-ough it thinks sectors will increase in importance rather than diminish.

Edward Niehoff, who manages ABN Amro&#39s global growth fund, says: “Country of quotation does not matter that much anymore – sales are now on a global basis. The correlation between European markets is increasing. It has become increasingly difficult to distinguish yourself when you only look at country performance.

“The world has changed as a result of globalisation and country selection does not add enough value.”

ABN Amro sees the euro as a major factor in reducing the importance of countries, highlighting that companies will be kept on a level playing field.

But if stockpicking is set to become the overwhelmingly driver for outperformance, it seems increasingly likely that fund managers are to have a much harder time in the years to come.

From the IFA&#39s perspective, the increasing importance of stockpicking will make it an even harder task to pick the winning funds.

Michael Philips partner Michael Both agrees stockpicking has become key and admits picking funds has become more of a lottery than ever. He says: “Stockpicking is everything now. It may not be in the long term but it certainly will continue to be in the short term. That means you are relying on the stockpicking ability of the manager when most of them have not got stockpicking ability.

“It is a lottery as to whether what you pick is worth the paper it is printed on. It is so expensive to get in and out of funds that you have to take a long-term view.”

The difficulty of picking funds for the IFA will no doubt fuel the regulator&#39s case to introduce higher qualifications for investment advisers. Both believes the regulator already lays too much responsibility on the IFA for their fund selections and says the limited information available on what a manager is doing makes it increasingly difficult for the adviser.

While the fund managers believe the importance of stockpicking is here to stay, Both is more optimistic that factors such as country and sector will once again become important.

In the meantime, it is perhaps little surprise that the managers which are taking the most money at the moment are the well-known star managers which have proven themselves over the longer term. Firms trying to place a new manager on the map are likely to find the going difficult in the current environment.


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