Investors in European equities must focus on the highest quality businesses in 2019 as many companies struggle in what is an increasingly difficult environment in which to grow profits, Man GLG’s Rory Powe has said.
Powe, manager of the Man GLG Continental European Growth fund, said he is cautious on the outlook for the coming year as the global economy is decelerating and consumer sentiment is fragile. As a result, he said investors need to learn some clear lessons from 2018.
In particular, he emphasised that now is not the time to compromise on quality when stockpicking, as company resilience is more important than ever.
“For a company to make it into our portfolio, it must have competitive strengths which we view as formidable, it must be serving an end-market with structural tailwinds, and it must be entering a five-year period which can be described as its “imperial phase,” Powe said.
Powe has lifted the threshold for inclusion in his £1.3bn portfolio, streamlining his hunting ground for stocks significantly.
“We have cut the size of our ‘hinterland’ from over 250 stocks to less than 150 and we currently own only 30 stocks in the portfolio, with the top ten holdings accounting for more than 55% of the fund,” he said.
“Central to this is being high conviction in names that do surpass a high quality threshold. We have been raising the bar further of what we mean by this.”
In the consumer space in particular, Powe is being more discerning in the current environment, focusing solely on companies with consistent, repeatable earnings.
“We believe, the consumer is more demanding than ever on price and quality, and will behave very differently to the past,” he said.
“The consumer stocks we own must therefore have something sustainably special and differentiated about them, and now is not the time to compromise on quality.
“We are also most likely to find increasingly rare pricing power in the business-to-business world, but only where companies enjoy extraordinarily strong competitive positions which are defendable for many years, as well as offering genuine added value to their business customers.”
Since taking over the portfolio in October 2014 Powe has
delivered 87.7%, above the reference index return of 37.7%.
 According to Man GLG, as at 31 January 2019, versus the reference index of the FTSE World Europe ex-UK TR GBP.