Interactive Investor

Fund profile: JPMorgan Europe Dynamic ex UK

22nd October 2014 12:12

Rebecca Jones from interactive investor

Launched on 30 September 2004, JPMorgan Europe Dynamic ex UK recently celebrated 10 years of investing. To mark the occasion the fund can now boast top-quartile performance over the period, returning 190% compared to an average of 112% from its sector, IMA Europe ex UK, in the 10 years to 5 October.

Reflecting the changes in the global economy during the last decade, however, the fund has not had an easy ride. Despite three straight years of strong outperformance from launch, manager John Baker - who took over in January 2005 - soon came up against the global financial crisis of 2008, during which time the fund lost 27%.

The fund's focus on "high-quality" growth names also meant it underperformed during the cheap value-oriented rally of 2009, returning just 16% to the sector's 19%, while in 2011 Baker's portfolio was again hit hard, losing close to 20% compared to 15% from the sector.

Uncompromising approach

In the boom years of 2012 and 2013, however, the fund returned 22% and 37% respectively, helping to propel it to the top of its sector over one, three and five years on a cumulative basis.

The nature and timing of Baker's wins and losses go some way to explaining his investment approach, which is uncompromising in its focus on company fundamentals and its dismissal of market sentiment and cyclical "stock rotations".

"When we are assessing an investment opportunity there are three things we look for: positive earnings revisions, attractive valuations and quality. If the stock meets all those criteria we don't let a macro view influence our decision, as we know that over time these things are very strongly predictive of share price outperformance," he says.

As an example Baker cites BMW, which he says displays all of the characteristics he finds desirable in a stock including a cheaper valuation than its competitors (currently 9.14 times earnings), strong earnings per share momentum and an "underappreciated growth opportunity" in electronic cars for Chinese markets.

BMW does not, however, feature in the fund's top 10 holdings, which are instead dominated by pharmaceutical and financial names including Novartis, Sanofi, Roche, Allianz, Santander and ING Group. Despite this, Baker insists he is not making any sector calls; rather, each company has passed his strict criteria.

Of all his pharma stocks, Baker is most keen on his 10th-largest holding, German firm Merck, which currently occupies 1.7% of his portfolio. The manager believes the most positive factor for Merck, which has three distinct divisions including a chemicals arm that produces electronic components, is its planned acquisition of US specialist chemicals maker Sigma Aldrich.

News of the acquisition caused Merck's shares to soar more than 6% between 19 and 24 September and, according to Baker, it should boost Merck's earnings by 11% in the first full year after completion.

Fresh European sell-offs

Perhaps unsurprisingly given the manager's unwavering investment approach, the JPMorgan Europe Dynamic ex UK fund is not faring well in the current sell-off within European markets. In the last month alone the fund has lost 9% compared to 8.3% from the sector, placing it at number 86 in a sector of 104 funds.

However, Baker remains sanguine, insisting that markets have been characteristically overreacting to negative growth reports from countries within the region, particularly from its economic powerhouse, Germany.

"For example, France has just seen its first fall in unemployment since October last year, while purchasers managers index data is still in expansionary territory; industrial production figures out of Germany in July were actually strong," he says.

On a longer-term view, Baker believes Europe also seems to be "grasping the restructuring metal" with a number of formerly reform-resistant countries, most importantly France, finally implementing the structural changes needed to stimulate growth in their economies.

"Following the lead of Germany and Ireland, which now have two of the strongest economies in Europe following reform, President Hollande of France has agreed to cut €50 billion (£40 million) in social security spending and cut business taxes, while in Italy new prime minister Renzi is also starting reforms. On a three- to five-year view this is very supportive of European equities," he claims.

Consequently, Baker doesn't plan to make any changes to his portfolio, but will be watching carefully for any progression in the Russia/Ukraine conflict, which he believes is the single biggest threat facing the European economy.

Overall, though, if his stocks continue to meet his investment criteria - particularly earnings upgrade potential - he will continue to hold them.

"We firmly believe that our focus on earnings, valuations and quality will continue to drive performance over coming years regardless of market cycle. This fund outperforms and delivers alpha in both up and down markets," says Baker.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.