Mark Dampier: Neptune banks on Spain, Portugal and Italy to turn tide for Europe

The Analyst

One of the most impressive young fund managers I have met over the past few years is Rob Burnett, who manages Neptune European Opportunities. He went through a baptism of fire when the previous manager left suddenly, but he relished the position from day one. Since he took over the fund in May 2005 it has grown by 167 per cent compared with 107 per cent for the average fund in the IMA Europe ex UK sector.

It has not all been plain sailing. Performance in the first few years was good and the decision not to hold financial companies just before the credit crisis hit proved correct. But performance over the past couple of years has not been as good, although more recently there have been signs of a turnaround.

I met Mr Burnett last week and found him extremely positive on a region perpetually shunned by many investors (to me the latter is always a good indication of an attractive investment opportunity).

He made the bold claim that the European sovereign debt crisis is over and the region is set to experience a sharp economic recovery. He suggests European governments are now solvent and are less likely to face higher borrowing costs via rising yields on their bonds.

Mr Burnett cites the fact European countries are reporting current account surpluses as evidence for this view. A positive current account balance means a nation is a net lender to the rest of the world, rather than being reliant on borrowing foreign money. Bond market investors tend to view current account surpluses as positive so demand less (or do not demand any more) interest from a country to lend it money.

Some commentators have claimed the current account surpluses have stemmed from a collapse in imports. This is true to some degree, but exports have also improved dramatically, while European economies have benefitted from falling costs of production and a drop in labour costs by more than 20 per cent. This is also helping attract capital to Europe.

This economic expansion can go on until at least 2017, according to Mr Burnett, as business confidence is improving and companies have plenty of cash, but they have not started to invest it yet.

His view of the wider economy helps him decide which sectors to invest in. He then aims to find the best companies within these sectors and in this regard he is supported by a strong team of analysts at Neptune.

Over the past few years funds that have performed well have tended to concentrate on companies generating earnings internationally. Mr Burnett believes things are changing and it is companies that will benefit from domestic economic recovery in Europe that will perform best.

He also feels it is time for a higher-risk approach and he is focusing on out-of-favour areas which have performed poorly and look good value. He believes there is a strong chance companies in Spain, Portugal and Italy could catch up ground lost to peers based elsewhere and has been increasing exposure accordingly.

At the sector level he is concentrating on banks, car manufacturers and utility companies, while he also has a bias towards higher-risk smaller and medium-sized companies. These are all areas that have not performed as well in recent years and he is confident they look very cheap with the potential to rebound strongly.

One area I might have expected Mr Burnett to have more exposure to is energy. He remains negative because oil price falls are being predicted, driven by declining Western demand, and new discoveries such as the shale oil deposits in the US.

He does not believe demand in emerging markets is enough to compensate for these negatives. It is worth noting that if the oil price did fall significantly this could be positive for global economic growth.

In conclusion, and as I have said many times before, Europe is unloved, unfashionable and unwanted. This is surely a buying signal in my view and if Mr Burnett is right a portfolio biased towards more economically sensitive companies should start to perform strongly.

He has been a little too early with this view so far, hence the initial poor performance, but over the past few months things have been better. I made my first investment in the fund shortly after seeing Mr Burnett.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent