Liontrust’s European managers have reinvested large chunks of their portfolios to find companies whose earnings will surprise investors as economic uncertainty persists.
Gary West and James Inglis-Jones have turned over roughly 60% of their Continental Europe fund and approximately 40% of their European Absolute Return fund following their analysis of 2009 earnings.
In the Continental Europe fund, the managers reduced their financials weighting from 18.9% at the end of March to 2.6% at the end of July and boosted industrials from 23.4% at the end of March to 32.7% at the end of July.
Inglis-Jones says financials looked more fully valued than industrials following the recovery in beaten-up stocks last year.
“The industrials weighting has gone up a bit. In a lot of cases, it’s because a lot of them were very quick to cut costs and focus on cash generation,” he says.
The number of stocks in the portfolio has also increased from 24 to 37 as the managers saw more companies who might surprise with better-than-expected earnings results.
According to Inglis-Jones, investors have also reacted more favourably over earnings surprises this year due to concerns about stocks weathering the global recovery and a greater focus on high-quality stocks. (article continues below)
Many of the changes occurred over April and May after the managers started analysing year-end results for 2009 in February and March.
In the second quarter, the manager also reduced UK weightings in their pan-European absolute return product from 30.1% to 23.1%.
However, the weighting remains by far the largest single-country net long position in the portfolio.
The managers also closed a short in France from 10% to 2% of the gross exposure.
Based on a bottom-up analysis of cash flow and earnings forecasts, they had invested in Cargotec, Kongsberg, Metso and M-real by April in the Continental Europe fund.
In May, they added 20 more stocks and eliminated Alstom, Munich Re, Interroll, Kuoni and Top Danmark.
The European Absolute Return fund’s long-only positions resemble those in the Continental Europe fund, except the European Absolute Return fund can hold UK stocks and cannot hold any name with a market cap of less than €1 billion (£800m).