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The cutting edge

James Phillipps analyses core holding Baring European growth fund.

Growing domestic demand and robust GDP growth in the eurozone will offset the impact of any US slowdown on Europe, says Baring European growth fund manager James Buckley.

He says GDP growth in the eurozone has increased threefold from just 0.8 per cent in 2003 to a projected 2.4 per cent in 2007.

Unemployment remains high at 7.3 per cent but this has not stopped consumer demand picking up over the past six months, boosting industrial and consumer stocks and helping allay concerns about a US slowdown.

The MSCI Europe ex UK index has almost doubled since the lows of 2003. However, Buckley says it is still below its 2000 peak, unlike the US and Hong Kong which have repeatedly been reaching new highs this year.

Despite the scope for extra growth and corporate profits being at record highs, Buckley says the market has not rerated companies on a price-earnings basis and is pricing in a much bigger fall in earnings than he feels is likely.

He does not specifically target stocks likely to be takeover targets but the 283m fund has benefited from bids made for Puma and Altadis although he admits he did not hold ABN Amro so missed out on the bidding frenzy for the Dutch bank.

Buckley has a large focus on peripheral Europe, which has been justified by the massive outperformance of Portugal, Ireland and Norway – among the smallest index constituents.

“Most of the biggest countries by index weighting delivered sub-par performance last year whereas some of the smallest markets were the best performers,” says Buckley.

He is confident that while Irish stocks have been poor in the first quarter of 2007, the case for peripheral eurozone economies remains very strong, with an improving outlook for the major index countries.

Buckley joined Barings in 2005 and over one year the fund is up by 20.7 per cent compared with the sector average return of 16.4 per cent, ranking it sixth out of 94 funds. Over three years, the fund is up by 103.4 per cent compared with an average of 89.1 per cent and is ranked 13th out of 86.

Justin Modray, head of communications, BestInvest

“It has been a strong fund since James took over the portfolio. It underperformed the FTSE Europe ex-UK index from 2002 to mid-2005 but since James has taken over he has outperformed that same index on a cumulative and discrete basis. He is a highly focused manager with lots of conviction in his bets, many of which seem to pay off.”

Ben Yearsley, senior adviser, Hargreaves Lansdown

“His performance is good in a sector that is littered with a load of strong funds run by talented managers. James may need to articulate himself a bit more to explain his process to advisers, thus boosting his profile in the market.”

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