There seems to be a growing acceptance among investors that, if you want to achieve superior levels of growth with your portfolio, you need to be investing in the emerging markets, particularly those of the Far East, rather than the more mature ones of North America and Europe.

This is not a line that would find favour with Tim Stevenson. As the manager of the investment portfolio for Henderson Eurotrust, an investment trust specialising in finding larger growth companies in continental Europe, he has built up a strong track record of identifying companies and sectors that can deliver strong returns, despite being based in a relatively low-growth economy.

He says, ‘I studied economics and European studies and have been covering European markets since 1982. That was early days for investment in Europe and a lot has changed since then. I have been at Henderson since 1986.’

Focused on capital growth
In fact, Stevenson has been involved in the management of Henderson Eurotrust’s portfolio since it was launched, although the trust itself has undergone some significant changes. ‘The fund itself was launched as a split in 1992, initially with an income bias, but that changed after three years.

‘Being a split-capital trust, we had a future liability that we had to repay, totalling £12.3 million. That was easily covered by 1995, so at that point we ditched the UK element and focused on capital growth. I have been on the board of the trust since 1992 and manager since 1994.’

He adds, ‘In 2002, we repaid the zeros and got approval from the shareholders for a continuation of the fund for five years. We got another continuation last year that will take us through to 2010. We would have preferred five years to enable us to adopt a longer-term investment strategy, but our shareholders felt that three years is now the standard.’

Having to face these regular votes to permit the continuation of the trust has an impact on the way that Stevenson manages the portfolio, although he points out that this has positive as well as negative aspects. ‘It does mean that they can get rid of us if we are doing a bad job, which, of course, we have no intention of doing. But it does impose a discipline on the portfolio. I run a focused portfolio and it means that you can’t afford to run for too long with something that isn’t performing.’

A fund for Europe
The focus of the portfolio is solely on Europe, rather than taking a pan-European approach, which would also include UK-listed companies. Stevenson asserts, ‘The fund invests in continental Europe only, and I feel quite strongly about that. This fund targets UK investors, and UK-based investors will probably have a large UK exposure already. So investors are buying this fund because they want to diversify.’

He adds, ‘It is a very focused fund. We are not in the European emerging markets per se, although we will invest in Central European markets if we find something sufficiently attractive there. For example, the fund has had a holding in the Czech Republic, although not for some time. But definitely no Russia, no Turkey and nothing in any of the “Stans”.’

The other key characteristic of the portfolio is that it concentrates on stocks at the upper end of the capitalisation scale. Stevenson points out that ‘It is very much a mid- to large-cap fund, with a growth bias. I tend to exclude small caps, by which I mean companies capitalised below a1 billion, because we also have Stephen Peak’s fund [TR European Growth] covering that area and he does it very well.’

He adds, ‘At Henderson Global Investors, we have a big European team that is working on a lot of investment ideas. We each have our individual enthusiasms and I would say that I am the most growth orientated of any of them. So, for example, I may well be prepared to buy something  at 20 or 25 times earnings, but which is growing, which my colleagues would reject as being too expensive.’

A long-term view
So how does Stevenson go about finding stocks for the Henderson Eurotrust portfolio? He explains that ‘The cut-off level for me is a minimum total return of ten per cent a year. That doesn’t sound like much, but if you can deliver that every year, with inflation at only two or three per cent, then you will deliver very strong growth.’

He adds, ‘I use price/earnings to growth figures a lot, although this can be a dangerous measure, as you can manipulate the figures to fit your case. But I am not just looking at one year in isolation. You need to look at a company over a period of years and combine it with patience. However, that is not just sitting there doing nothing, but monitoring the stock to see if it reaches our growth expectations. Then, if circumstances change, and that growth has been achieved, we probably wouldn’t want to be involved.’

At the heart of his approach to investing is a conviction that you need to understand how an individual company functions, by following it over a long period of time before you actually make an investment. ‘I would stress the importance of getting to know companies over time. You have to remember that companies don’t make investment decisions on a three- or six-month basis. They are looking to make money over the longer term.’

He adds, ‘For example, we have a stock called Essilor that has been in the portfolio for well over five years. This is a company that I am happy to buy and hold, because it displays consistency and reliability of growth and has an attractive growth price-to-earnings ratio.

It is not necessarily going to be a spectacular performer this year, but it will be one of my most consistent performers over the next two or three years.’

Stevenson feels that ‘Knowing these companies over a period of years is very important. You can follow a company for years before you invest – for example Linde in our current portfolio – but it is only when you start buying the shares that you really get to know what is going on with that company. You talk to the management more, you follow what the analysts are saying about it and you will either grow in confidence that you have made the right decision to invest or you will find yourself asking whether you should be in there at all.’

An evolving market
Stevenson also stresses the importance of maintaining a flexible approach that can react to changes in market conditions. He feels that ‘There is no simple definition of what constitutes a growth company. The sources of growth today are different from those of five years ago, and they will be different again in five years’ time. The market is constantly evolving. For example, I have engineering companies in the portfolio, and you would not immediately think of engineering as a growth sector.’

But he points out, ‘There are parts of the economy that will suffer in the current squeeze, but not necessarily engineering. Conversely, pharmaceutical companies have not been growth companies for two to three years and it is likely that it will be at least another two or three years before that changes. Similarly, you ask yourself when banks will be growth companies again?’

Stevenson reports, ‘Currently there are 42 holdings and the fund has total assets of £121 million. In general, I am happy to take a two- to five-year view on our holdings, and I will usually invest on that basis. Some holdings do stay in the portfolio for a long time. Last year, the turnover in the portfolio was only 48 per cent, which is the lowest I have ever had. I hate trading. If something has to be done, then I will do it; fundamentally we are following a buy-and-hold strategy.’

He adds, ‘If you look at the global economy, it is not a question of whether the US will experience a recession but how deep it will be, and it would be very naive to assume that Europe can remain immune from its effects. But there are some parts of the European economy, and of the US and UK economies for that matter, that will continue to grow, because they have to invest in certain industries.’

Winners and losers
As result, he insists that ‘If you invest in good, solid growth companies, they will deliver that growth over time. I have a lot in the outsourcing and business service areas, logistics companies and a lot of healthcare companies. At the moment, I do not favour banks and insurers. The portfolio only has 5.5 per cent in financials, and I won’t have any position in the portfolio that is less than one per cent.’

Stevenson continues to be wary of some underperforming sectors: ‘I also don’t like pharmaceutical companies at the moment and would be wary of cyclical stocks, but you can make a case for engineering companies, because of the need to spend on infrastructure. But I have no auto manufacturers – it is a very unattractive sector as cars are a major discretionary spend.’

However, one element that is not factored in when deciding whether or not to invest in a company is where in Europe it is listed. Stevenson asserts, ‘I have no idea what the geographical split of the portfolio is. It is purely derived from where the companies we invest in happen to be based.’

He adds, ‘My working assumption is for a European economy that is a very mature area. You won’t see Asian rates of growth there; so what are more important than the absolute growth figure are the changes that are happening within the European economies, in terms of things like government spending or increasing efficiency. Studying  macroeconomics in Europe would be like watching paint dry.’