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Plenty of value in ‘toxic’ Europe, says GAM Star manager

Niall Gallagher, manager of the GAM Star Continental European Equity, finds bargains in European equities as valuations fall to a 30 year low.

Plenty of value in ‘toxic’ Europe, says GAM Star manager

The words ‘toxic’, ‘crisis’ and ‘default’ rarely attract investors and so it follows the eurozone has become the most under-loved region for equities. 

While the stampede out of the asset class has caused share prices to drop it has also provided a buying opportunity for some fund managers. 

Niall Gallagher, AAA-rated manager of the GAM Star Continental European Equity fund, says the fear around investing in the region has affected core and peripheral markets.   

‘It’s a shame the “Europe” label is a bit of a barrier,' Gallagher said in an interview with Citywire. 'If we were to call this a high quality globally exposed growth fund, we probably wouldn’t have a problem raising assets but the label Europe is somewhat toxic and I think therein lies the opportunity as we find there are lots of interesting cheap stocks around.

‘The whole of Europe is particularly cheap, it’s not just peripheral Europe, though it’s quite stock specific rather than being a general argument for saying “let’s go out and buy all the PIIGS because they’re cheap relative to Germany” as that’s not the case.’

Gallagher is one of a number of European equity managers to rise in the Citywire ratings this month. 

He notes the region is trading at a significant discount: ‘Europe is trading at a 37% discount to the US on this price to trend earnings methodology. The average discount over the last 30 years is 8% so compared to US equities, European equities are the cheapest they have been in 30 years and that applies even if you rip out the financials and look at market on an ex-financials basis’, he adds.

The GAM Star Continental European Equity fund has given total returns of 20.2% over the past three years, to beat the benchmark MSCI Europe Ex UK total returns of 8.1%. Many of the portfolio’s holdings have a large exposure to emerging markets.

Gallagher explains: ‘The continental market has even higher exposure to emerging markets than the UK. If you’re looking for companies that are going to grow over the next two to five years you are naturally going to be drawn to those companies that have a footprint in fast growing parts of the world, which is why things like Hexagon or Atlas Copco, AB InBev and Schindler are attractive.

‘What we’re finding is that increasingly our emerging market colleagues are interested in some of our stocks, and what you get when you own a Swiss or Swedish company which has the bulk of its revenues in emerging markets, is emerging market growth with developed market corporate governance.’

The fund's top holdings include lift-maker Schindler, IT support provider SAP and the Swatch Group. The biggest contributor to the fund has been Paddy Power.

Gallagher says: ‘It’s a gaming company involved in both traditional bookmaking shops in Ireland and the UK but it’s also the second largest in the UK for online sports bookmaking and the largest private bookmaker for online in Australia.

‘The online business for Paddy Power has gone from strength to strength over the period and online gaming is now 20% of the revenues and on top of that they’ve also began to expand into other jurisdictions.’

1 comment so far. Why not have your say?


Jun 27, 2012 at 08:48

I'm investing in Europe at the moment, but I'm mainly using investment trusts. Not only are you buying cheap European equities, but you're doing it via a vehicle that is often on an additional 10-15% discount. Hopefully discounts will narrow in future years, and even if they don't, the dividends are boosted.

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