Value Investment G Fund Opportunities Europe IC: Arbitrage and Prospects
After 12 years of outperforming growth stocks in Europe and in a context of changing economic assumptions, this selective investment approach is beginning to reveal its full potential.
How are value stocks performing in the current context?
After 12 years of outperforming growth stocks in Europe and in a context of changing economic assumptions, this selective investment approach is beginning to reveal its full potential. Faced with a combination of inflation (currently at an annual rate of 10% in the Eurozone), rising interest rates, geopolitical tensions and the energy crisis, investors have preferred to position themselves on value stocks and on sectors that offer greater protection against inflation, while turning away from higher-priced growth stocks.
However, although value stocks are currently benefiting – and will continue to benefit – from the context of inflation and rising interest rates, growth stocks also remain buoyant due to the structural changes of our society. In other words, promising figures for value stocks and growth stocks are not mutually exclusive, and we could well see high performance in both management styles.
From 31 December 2021 to 30 September 2022, the performance of G Fund Opportunities Europe (M) was -14,79%, compared to -21.83% for its benchmark index 1
This summer, fears of recession and energy crisis have gained ground. Following the closure of the Nord Stream 1 gas pipeline, Russia stoked fears that several countries in the Eurozone would be forced to ration gas or electricity in the coming months.
Which stocks exemplify this strategy?
G Fund – Opportunities Europe is an active management equity fund that has adopted a bias towards value investing since 31 May 2021. The single performance driver of this conviction-based equity fund is the selection of undervalued European stocks.
The fund picks stocks that in our view offer prospects of profit growth over the next 2 to 3 years due to their current underpricing. As a function of the economic cycle, the fund combines and weights a variety of specific value management categories:
- Self Help category (example: Carrefour).
This category includes companies that normally post satisfactory results but are currently encountering temporary difficulties, due to a technology shift, new competitors, poor strategic decisions or major changes in regulations.
- Defensive Value category (example: Deutsche Telecom).
This category includes companies that have low growth in sales and profits and are underperforming their peers but that also have a real capability for resilience.
- Cyclical Value (example: CaixaBank).
The profitability of cyclical companies varies with the economic environment. Investment opportunities can arise when the price of these stocks falls below a valuation based on the average profit margin over the full cycle.
- Low PE category (example Rio Tinto).
Some companies may have low price-to-earnings ratios if investors are anticipating a future change of fortunes. However, an opportunity may arise if high profitability is sustained longer than generally anticipated.
1 MSCI EMU up to 4 March 2022; subsequently MSCI Europe.
A sustainable finance label – why?
G Fund Opportunities Europe obtained ISR* certification last May.
The reason for obtaining this latest certification is to complete the coverage of the ISR Label in all equity management styles, including this specific niche of expertise.
This conviction management style, which is relatively rarely certified on the French market, is founded on fundamental analysis and is, by definition, fully in line with the ISR management philosophy.
The eligible investment universe is determined on the basis of an ESG analysis that combines qualitative assessment (convictions of the fund’s analysts and managers) and quantitative measurement (calculation of an ESG score for each stock in the investment universe), to produce a weighted average ESG rating for the overall portfolio.
As with every other ISR-certified fund in our product family, exclusions are applied for entire economic sectors (such as thermal coal), specific companies (“Major ESG Risks”) and in response to regulatory requirements (controversial weapons).
The fund is also classified as an Article 8 fund under the SFDR.
* “ISR” is the French acronym for SRI, Socially Responsible Investment
** Target: weighted average ESG rating of portfolio > average ESG rating of the investment universe after eliminating the bottom 20% of stocks with the lowest ESG ratings.
What are the future prospects for value investment?
With the emphatic return of long-term inflation, several factors prompt us to remain positive regarding value investment.
For example, this management style has a higher dividend return than the major equity indexes. These higher dividends not only provide a regular inflow of revenue but also help to soften the negative impact of inflation.
As on 30 September 2022, the average dividend rate for 2022 was 3.7% for G Fund Opportunities Europe and 3.2% for its benchmark (MSCI Europe NR).
Since G Fund Opportunities Europe is invested in lower-priced stocks than its benchmark (MSCI Europe NR), it is positioned on companies that are less sensitive to inflation and high inflation rates. For 2023, the average valuation level (P/E) of the stocks in G Fund Opportunities Europe is 10.5x, compared to 13.7x for its benchmark.
Arbitrage on G Fund Opportunities Europe :
For November, we remain confident with regard to:
- The energy sector, where demand remains resilient, even in a period of recession (Self Help),
- Utilities and health sector stocks, since their profile as “defensive value stocks” is attractive in the current context.
- Telecommunications, where certain stocks, such as OTE (Greece) have a favourable competitive placing.
We have reduced our overexposure to the banking sector (Cyclical Value) and commodities (Low P/E Value).
Finally, we have sold all our positions in the automotive sector, which is still negatively impacted by semiconductor shortages.
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