Jupiter European manager Alexander Darwall is continuing to stick with his preferred quality large cap stocks and argues that his largest holding, Novo Nordisk, is actually cheaper than it was two years ago despite a trail-blazing stockmarket run.
Amid an ongoing debate as to whether a raft of quality European defensive and growth large caps now look expensive after strong market runs, Euro stars AAA-rated Darwall is happy to stick with his favourite quality names, on the belief that many can continue to thrive despite the poor macroeconomic backdrop.
Novo Nordisk, Novozymes and Syngenta are the £1.8 billion fund's three biggest holdings, making up around 21% of the portfolio, and are trading at 25, 26 and 22x earnings respectively. But long term investor Darwall believes these 'special' companies are well worth holding on a multi-year time horizon.
He told Citywire Global: 'It is true that some of our companies are optically expensive if we look at short term multiples but it is important not to confuse this with poor value. For us the key is to first look at the downside and try to identify proven businesses that benefit from secular drivers and do not rely solely on the favourable tailwind of macroeconomic growth.'
'The types of "special" companies we try to identify can even enjoy tough times as weaker players fall away. It is noticeable that as the crisis develops so outsourcing, efficiency, cost cutting products and services, for instance, have seen rising demand.'
Novo Nordisk cheaper than two years ago
Darwall believes the investment case for his largest holding diabetes specialist Novo Nordisk is still intact, despite its stock price doubling since 2009. He stresses that not only is diabetes growing rapidly as a health problem worldwide, but one of its diabetes products has now been approved as an anti-obesity drug, opening up a new market for it.
'Novo Nordisk has always looked expensive but we see it as a "cheaper" stock now than a couple of years ago, even if the stock price has more than doubled since 2009. The stock is now trading at 25x earnings but it was already trading at more than 30x when I bought it 12 years ago and has been above 15x for most of the past decade. In the meantime the share price has risen by approximately 600%.'
Darwall is equally comfortable to keep Novozymes and Syngenta among his core holdings as he believes both have resilient businesses and unique technology that create high barriers to entry for their competitors. He has held both companies for more than a decade.
In general our companies enjoy structural advantages and we expect them to continue to make progress. Most of them continue to operate in areas of secular growth such as digital payments, world trade, outsourcing, population growth etc. Patience is key; many of our ideas may take time to develop but we are comfortable with this as we look to generate long term alpha and we are not positioned to benefit from short term beta plays.
As Darwall is looking for long term structural growth, turnover remains extremely low and within the Jupiter European unit trust just nine stocks, representing 48% of the portfolio, have been in the portfolio since October 2005.
He remains underweight what he views as 'short term beta plays' such as financials due to a lack of transparency and differentiation, and most cyclicals and commodity stocks due to 'a lack of pricing power, differentiation and a dependency on differing macro scenarios.'
He also dislikes property due to a lack of differentiation, and describes utilities as being 'captive companies with no pricing power and [suffering from] political interference' and conglomerates as having a 'lack of focus'.
Despite his financials underweight, a number of specialist financials were among his best performers in 2012. Positions in Norwegian bank DnB Nor and UK - listed but Asia - focused Standard Chartered have performed well, as have specialist lenders such as Provident Financial and Grenkeleasing.
Darwall has been gradually decreasing his small cap weighting in recent months from an historic average of around 10% to its current 3.5% while the large cap component sits at 77% - near to its historical maximum.
Much of this has been down to a number of Darwall's favoured mid caps, such as Novo Nordisk and Dassault Systèmes, growing into large caps after prolonged strong performance.
'We [don't believe] that larger companies are necessarily more defensive investments. It is worth remembering that some of the largest constituents of the index – and some of the best covered by sell side analysts – have been the worst performers over the past decade, such as Nokia, Vivendi and the banks. In the year to date, large cap telecoms, utilities and car manufacturers have been among the worst performers.'
Over five years to the end of December, the fund has returned 43.1% compared to the MSCI Europe ex UK loss of -3.2%.
Citywire Watchlist Verdict: Darwall’s disciplined investment approach leads him to focus on what he believes to be the highest quality companies with the most sustainable business models regardless of the macroeconomic backdrop. His multi-year investment horizon means the fund is relatively low turnover and unlikely to chase short term momentum, which translates into impressive long term numbers.