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The BlackRock dynamic

10 MINUTES WITH..JAMES SMITH

Alister Hibbert joined BlackRock as part of the defecting European team from Swip in 2008, having also worked for a decade at Invesco Perpetual.
His European dynamic fund is among the best performers in its peer group, with Hibbert describing the mandate as relatively unconstrained but still benchmark-aware.

“This vehicle is among the more risk-tolerant in our range, with flexibility to deviate from the benchmark. But we are always monitoring the stocks not owned,” he says.

“The big benchmark names not held are the fund’s cost of capital and analysis of the financials underweight last year identified the right point to re-enter this sector.”

Hibbert seeks companies that can significantly beat earnings expectations over the subsequent two or three years and says these opportunities can come from either value or growth situations.

On the former, he tends to focus on underperforming companies with a decent franchise where management is turning things around. With the latter, the team looks for stocks where growth prospects are underappreciated by the wider market.

He took on the European dynamic fund in March 2008 and produced solid relative returns for the rest of the year by remaining extremely defensive, struggling to find firms offering the required earnings upgrade cycle. This meant overweight positions in the usual defensive areas of pharma, food and beverages and a considerable underweight in financials.

By March 2009, however, the fund had already moved overweight financial stocks and therefore benefitted from the sharp bounce of that year.
“We made this shift as it became clear the world was a much less bad place than widely thought,” says Hibbert.

“Banks in particular put out encouraging earnings reports in the first quarter of 2009, suggesting areas such as non-performing loans had peaked. This balance sheet integrity allowed us to start modelling future bank earnings and what we called the miracle earnings season saw us move over-weight financials after being underweight since 2006.”

Other key overweight positions last year were various industrial recovery situations as well as more classic cyclical opportunities such as German trucking company MAN.

By the end of 2009, Hibbert had started selling financials down on concerns over the growing cost of funding, especially as sovereign debt problems in peripheral countries started to emerge.

“As funding pressure grows, banks start competing with each other for deposits and that impacts on overall profitability,” says Hibbert.

“We moved into more real economy cyclicals and have remained overweight there this year, focusing on areas such as luxury goods that benefit from high exposure to the growing Asian consumer.”

Hibbert and team are bullish on emerging market growth – a key theme in the European dynamic fund – with consumer discretionary stocks such as Nokian Tyres a play on this.

“This is the world’s leading producer of winter tyres, vital in countries with heavy snowfall such as Russia, the CIS and Nort America,” he says.
“Emerging market demand has revolutionised the auto supply chain in Germany, for example, with Mercedes reporting 113 per cent year over year growth in sales to China in August.”

On the macro side, Hibbert says there are two key questions for Europe – the ongoing sovereign debt situation in the peripheral countries of Greece and Portugal and the wider issue of whether the global economy is facing a double dip.

His fund is 90 per cent exposed to stocks listed in core Europe – avoiding companies with revenue exposure to peripheral regions – and Hibbert says the impact on corporate earnings has been negligible.

“That said, sovereign problems have clearly hit sentiment and most asset allocators are underweight Europe, despite its superior economic picture to most of the developed world,” he says.

“As a result, the continent is cheap compared with the US and its own history, with companies just reporting the highest proportion of second quarter upgrades to sales and earnings outside emerging markets.”

As for the double dip question, BlackRock’s team sees little sign of any serious lurch back into global recession, with many emerging markets having their growth forecasts upgraded this year.

Hibbert says: “We have seen growing evidence of a mid-cycle slowdown but most firms can manage their way through this as opposed to a serious external shock, which looks unlikely from here.

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