A 9.3 per cent return in the first six months of 2014 has earned Saemor Capital’s Europe Alpha Fund a top ranking in the equity market neutral and quantitative peer group categories.
A pro-risk approach at the start of the year and subsequently a more cautious portfolio stance have worked out well, according to Saemor Capital’s founder and CEO Sven Bouman.
“The long as well as the short book of the fund performed well. Almost every sector made a positive contribution,” he says. “On a stock level, long positions Actelion, Pandora, Enel, Statoil and Yara were instrumental. Several short positions also added to the performance as their share prices came under pressure after issuing a profit warning.”
“Our quantitative stock selection model posted very solid returns. We look at roughly 50 factors in four quadrants: valuation, momentum, profitability & growth and quality. For the year almost all the factors we look at are in black with earnings revisions being the standout performer. Value factors are second-to-best. Early in the year investors were buying stocks with low cyclical valuation like price-to-book. Subsequently the more defensive value factors started to do well as economic data started to come in below expectations. As a result high dividend stocks came back in favour, helped by the low interest rate environment. Value and earnings momentum are the most important composites of our model and they both do well at this moment.”
Saemor Capital’s stock selection model has a flexible approach toward prevailing macro-economic and market environments. The fund manager started the year with a fairly positive stance on equities, based on the traditional turn-of-the year effect, return continuation and decent economic growth. The portfolio was tilted towards cyclical value at the expense of quality factors. The Saemor fund benefitted from a strong start to the year from European equity markets and higher risk names specifically. In February, factor weights were fine-tuned towards a mild slowdown scenario as earnings revisions continued to disappoint, the yield curve started to flatten and economic surprises turned less positive. After some hobbles in April, this positioning paid off handsomely in June when the fund posted its best month.
Bouman believes that at current prices, Europe looks fairly valued. Earnings-based valuation multiples continue to rise and are at 10 year highs, which makes it increasingly difficult for the market to absorb negative news. PMIs are in expansion territory, but have failed to translate into high earnings growth. The recent weakening in economic indicators, ongoing geo-political tensions and concerns about some European banks makes Saemor cautious for the short term. The market is already pricing most of the potential good news and it could be difficult for the market to absorb negative news. Moreover over the last two months the beta of the most attractive stocks has dropped significantly below the beta of the least attractive stocks in our universe. As a result, the fund currently has more defensive names in the long book and higher risk names in the short book with a net long bias to keep the beta of the fund close to zero.
The fund manger finds the longer-term outlook for Europe still constructive. Towards the end of the year earnings growth is expected to drive markets higher again. Rising earnings and potentially higher interest rates should underpin further allocation shift from bonds into equities. European equities are still lowly priced relative to fixed income and supported by the easing mode of the ECB, improving revenue and earnings growth, strong corporate credit markets and rising corporate activity. M&A activity looks to regain its traction with buyers that can borrow cheaply and have healthy balance sheets.
