This year, we’re giving out our first ever Pan-Europe Qualitative Fund Manager of the Year Awards. The awards are based entirely on the work of our team of more than 25 qualitative analysts across Europe and are meant to recognise managers who had a strong 2009, but who we also believe will do well for investors in the long-term and who have shown themselves to be good stewards of investors’ capital.
2009 provided our staff with something of a conundrum. On the one hand, after two horrendous years of markets roiled by the credit crisis, investors finally saw a strong rally that helped them claw back some of their losses. On the other, the rally was led by lower-quality, speculative issues. Hence, the funds that did best were often those that took the most risk. While that happens to have worked well last year, it’s rarely a strategy for sustained success and our own research has shown that investors often misuse higher-risk offerings, buying after runs and selling after downturns.
Our analyst staff vigorously debated the pool of nominated managers (click here and here to see the nominees for the awards), and we’re confident in saying that we believe them to be among the very best in their respective disciplines and the most deserving of our awards this year.
Morningstar Pan Europe Global Equity Fund Manager of the Year
Edouard Carmignac of Carmignac Investissement
2009 return: 42.6% EUR / 31.0% GBP
2009 percentile rank in category: 16
Qualitative Rating: Elite
We see a lot of highly benchmark-conscious managers in our work. Edouard Carmignac isn’t one of them. Indeed, he has never been afraid to go his own way. He founded the firm that still bears his name 20 years ago, and since then has built a core unit of highly skilled managers and analysts that oversee the group’s offerings. Indeed, he shows a confidence and originality in managing his funds that give them a clear ability to deliver meaningful outperformance.
Carmignac unabashedly uses top-down decisions to position the portfolio, selecting a compact group of 60 – 70 mid- to large-cap companies that fit with the team’s identification of macro themes, with recent areas of focus including Anglo-Saxon banks and emerging-markets, balanced by lower risk areas such as healthcare. Unlike many equity managers, Carmignac is also perfectly willing to use cash or hedging (primarily via short-selling of global index futures) to preserve capital if his macro views indicate it’s warranted and net equity exposure here can dip down to 60% if he has a defensive view.
Such moves helped the fund hold up dramatically better than fully invested rivals in 2007 and 2008, with the fund outperforming its peers by 15.7% EUR / 17.1% GBP and 12.7% EUR / 16.7% GBP, respectively. Notably in 2009, he put enough cash back to work to allow key investment themes such as banks, emerging-markets and natural-resources to drive the fund to a top quintile return of 42.6% EUR / 31.0% GBP. That performance is not unusual for Carmignac Investissement: it ranks in the first percentile of the Morningstar Global Large-Cap Growth equity category over 3, 5 and 10 years at end of January of 2010 and has posted only two below-median years in the past decade, with one of those missing by only a whisker.
Our analysts also hold Carmignac Gestion in high regard on several stewardship fronts. We do believe fees could be somewhat lower (the house engages in the French custom of charging “move commissions” on trades in the portfolio) but we think the culture of the group is generally strongly geared towards investors’ interests. To name one example, the firm discloses full portfolio holdings quarterly on its website, an all-too-uncommon practice and one that we applaud as we believe investors have a clear right to know what they own. Moreover, most of the managers, including Carmignac himself, invest in the firm’s funds—a practice we like to see as it aligns their interests directly with those of fund owners.
Morningstar Pan Europe European Equity Fund Manager of the Year
Francisco García-Paramés, Alvaro Guzmán de Lázaro & Fernando Bernad of Bestinver Internacional
2009 return: 71.9% EUR/57.9% GBP
2009 percentile rank in category: 6
Qualitative Rating: Elite
This small-cap oriented European equity fund undeniably had the wind at its back last year, but that’s not why we’ve selected it. Indeed, that was something of a strike against it given the risks inherent in the area and the relative ease of putting up big numbers as a small-cap manager in such an environment. That said, it’s hard to identify a team who had a better year for investors and also evinces so many of the qualities we look for from a qualitative point of view. Purely from a performance perspective, García-Paramés and his colleagues delivered in spades: Bestinver Internacional returned 71.9%(EUR)/57.9%GBP in 2009, and while small-caps did well, the managers clearly added value well above and beyond the general strength of the asset class. Indeed, the fund beat the average offering in the Morningstar Europe Small-Cap Equity category by the huge margin of 23.7 percentage points in EUR terms (+21.7 in GBP).
The team achieved those results using the same disciplined approach to value investing García-Paramés has employed here for the past decade (the fund’s Morningstar style trail clusters tightly in the small-cap value square, reflecting that consistency). Fundamentally, the managers apply the philosophy postulated by Warren Buffett and Benjamin Graham, seeking very high-quality companies with solid management selling at strong discounts to their fair value, and exploiting market inefficiencies by having a very long-term approach. In 2009, for example, the fund benefitted from a number of individual holdings that had been out of favour, including Debenhams plc, Virgin Media, and Oce NV among others. Although the fund had a large industrial materials stake in the periods, we note that consisted mainly of relatively mundane machinery and chemicals firms, not the higher-beta resources issues that many others benefitted from.
Like any small-cap fund, the absolute risks are high. In 2008, for example, the fund posted a large absolute loss of 44.7% EUR/27.2% GBP. But even then García-Paramés and his team showed an ability to conserve shareholders’ capital—the fund’s loss was smaller than 83% of its Morningstar category peers’. Longer term, the team has guided the fund to one of the best records around, delivering top-decile returns for investors over the past 3, 5 and 10 years.
From a stewardship perspective, we’re please to note that all three managers invest all or most of their own money in Bestinver funds, a practice we believe clearly aligns their interests with those of fund investors and shows their own a confidence in the firm’s ability to deliver. We also think well of Bestinver as a house; it shuns the all-too-common focus on “hot-dot” asset gathering and focuses on delivering good results for investors at funds that make good use of the skills of its managers. Indeed, it runs just seven funds, and has only launched one new offering in the past decade.
