Alt Ucits star Mondani eyes earnings arbitrage potential

European earnings forecasts are as misguided as they were at the start of 2012 and Alternative Ucits AAA-rated manager Gianmarco Mondani is ready to pounce once inevitable revisions take place.

Mondani told Citywire Global he is keeping the €181 million World Invest - Absolute Return market neutral fund broadly diversified to take advantage of these opportunities.

In the strategy, run by the Arkos Capital team which is now part of GAM, Mondani said he is aware of how stark earnings expectations changed in 2012 and foresees a similar scenario in 2013.

‘Look at what happens when an economy does poorly and Europe is going to continue to do poorly,' said Mondani, who co-manages the fund with fellow Citywire Alternative Ucits AAA-rated managers Roberto Cantaluppi and Paolo Longinotti.

'At the beginning of the year, earnings growth was predicted at 12% and now they are looking at around minus 3%. That is quite a big turnaround.’

‘Next year they are talking about it turning to 10% but if this situation continues and the eurozone continues like it is, then that number will be revised as well. That number will clearly be too high, so next year we will look at the revisions.’

An emphasis on companies with ‘winning niches’ is one of the main tenants of the World Invest – Absolute Return fund, Mondani said.

Earnings surprises

Recent outperformance, Mondani said, has been driven by surprising third quarter earnings reports across a wide array of sectors. However, he added this will be at the forefront of challenges for the coming year.

‘The difference between a company growing 45% or one growing 35% when everything is growing is minimal, in relative terms.'

'But in a negative growth environment, we are looking for a company that is delivering 10-15% when everyone else is showing negative earnings growth.’

‘Where are we going to find them? In Japan in the 1990s, you had the big automakers.'

'These were still able to grow earnings because of their strong export links but if you looked at the domestic names – the banks and so on – they were not growing at all.’

The World Invest – Absolute Return C fund has returned 25.24% over the past three years while the average manager in the Citywire Alternative Ucits Market Neutral sector has returned 7.18% over the same period.