Kevin Lilley (pictured) manager of the £55 million Old Mutual European Equity fund, is buying European banks in the view they are attractively undervalued, and Europe’s woes are less severe than forecast.
The manager, who took over running the fund on 14 December, has taken his position in financials to 2% overweight the benchmark, buying Spanish bank BBVA and increasing his exposure to BNP Paribas, Deutsche Bank and Credit Suisse.
He has funded the financials overweight by cutting his position in defensive stocks, selling 2.5% of his holdings in Nestle and completely selling out of Novartis, which was 3.5%, taking defensive exposure to a 6% underweight.
Lilley said he is buying banks at a time when many funds in his sector are underweight financials exposure.
‘They’re not fantastic per se, but valuations are so attractive, they have de-rated so much,’ said Lilley. ‘With the European Central Bank’s Long-Term Refinancing Operation, they won’t go bust.’
He added: ‘They’re cheap relative to the risk, at time when the majority of my sector is underweight banks.
Since the start of 2012, banks have also successfully launched bond issues, unlike last year, when there was an impasse on bond issuance, said Lilley, albeit at a high yield.
He also believes economic forecasts on Europe have been too bearish and has bought BBVA in the view Spain is not in as dire a situation as some analysts believe.
Lilley has also boosted his exposure to cyclicals, taking his position to 4% overweight. He has bought Renault, as car stocks were downgraded sharply last year, ‘far more than was warranted.’
‘Global-facing companies are important,’ said Lilley. ‘Around 55% of sales in the European index are intra-Europe; the rest are outside of Europe.’
Conversely, the fund is underweight utilities and other domestically-focused firms, where he said are hard to find pricing power.
Over the past three years the fund significantly outstripped its benchmark, delivering 25.67% compared with the MSCI Europe ex-UK Total Return of 12.57%.