Finding Europe’s World Beaters

Alexander-DarwallAlexander Darwall joined Jupiter Asset Management (‘Jupiter’) in 1995. He has 30 years of investment experience and has managed the Jupiter European Growth fund (SICAV) since launch. Alexander trained as an investment analyst with de Zoete & Bevan (BZW) before moving to Enskilda Securities in Paris in 1987, where he became head of French equity research. He joined Goldman Sachs in London in 1992, where he worked as a French equity analyst prior to moving to Jupiter. Alexander has a degree in History from Cambridge University.

The Jupiter European Growth fund is managed in a distinctive style that has been highly successful. It has been recognised by BENCHMARK as Best-In-Class for the Europe Mid-Cap Equity category.

Fund Manager Alexander Darwall suggests the Jupiter European Growth fund is very different to most European funds in that they do not run it as a way to ‘play’ Europe. As such, they are not unduly concerned with index risk, but are very concerned about company risk. “By focusing in-depth on the fundamental structural drivers of a business and the primacy of the consumer, rather than macroeconomic forecasting, we hope to identify genuine growth opportunities and patterns of corporate success across sectors”, says Darwall.

In all regions of the world, he contends, “if you look hard, you are likely to find companies that are doing something special. There are ‘world beaters’ among American companies, among Japanese companies and so forth. Europe is no different. There are around three and a half thousand companies from which to choose. I believe these include several ‘world beaters’ and our job is to try and find them.”

Intellectual property

So what is it that Darwall and his team are looking for in a typical portfolio component? He says, “Within a broad universe, I am attracted to a very specific type of company. It will typically have a unique product or service which gives it strong growth prospects, not only in its local markets but worldwide.” In Darwall’s view, success on the global stage should mean a company is less likely to be affected by domestic issues when they arise. Such companies share a number of characteristics such as the underlying business model being strong, and they are not captive to the whims of governments or regulators. For example, Jupiter’s business models seem to travel well, with an abundance of intellectual property that makes them a unique proposition in the market, and they do not carry too much debt.

The companies Darwall is interested in are tied to the outlook for their own individual businesses. “Our holdings tend to be dominant operators in niche areas, seeking to take advantage of the numerous growth opportunities available across a range of economies, regardless of general economic conditions. We aim to identify well-managed companies with ‘winning franchises’ that benefit from structural trends and their ability to enter new markets”, he comments.

A core fund component that conforms to this profile would be the leading insulin manufacturer, Novo Nordisk, which is a play on the diabetes pandemic. Darwall says, “This is a disease on the rise because of growing obesity globally. Novo Nordisk, in my view, has sustainable points of differentiation and advantage.”

Trading behaviour

The Jupiter investment team follows a highly disciplined approach in identifying opportunities and monitoring portfolio holdings. Darwall describes himself as “primarily a stock-picking analyst who looks for a very specific type of company. Our focus is on understanding companies – the characteristics of a company should always come first.” Darwall has long experience of understanding both the hard factors, such as economics, history, industries and finance, as well as the soft factors like company culture and institutional trading behaviour. “If I cannot understand something then I will not invest in it, no matter how large a part of the index it is. If I have an advantage then it lies in an ability to understand the fundamentals of a business better than the average analyst”, Darwall affirms.

The stock selection process is oriented towards gaining a clear understanding of a company’s business model: “We do not screen potential investment opportunities based on valuation,” says Darwall. “For us, that’s the wrong way round. First you have to understand how secure the business model is and then consider valuation. When the business model goes wrong, the valuation cannot bail you out. Most of the research work at Jupiter is done at a micro level through direct company contact, meeting over 130 companies yearly. Rather than relying on market sentiment towards these stocks, I form my own view.”

He is not unduly concerned about blending the different components of the fund. As he says, “We are very much aware that we offer an ‘unbalanced’ portfolio. The strategy is structurally underweight in a number of sectors, especially cyclicals (commodities, oil and gas, autos), just as it is underweight in conglomerates and regulated businesses (utilities, telecoms).”

Darwall’s portfolio is intended to be a collection of special companies with uncorrelated risk and supported by structural growth trends. “Despite the concentration (the top 10 holdings typically account for over half of the fund’s NAV) we offer uncorrelated stock specific risk, and the underlying businesses that make up the portfolio have a very different set of drivers. Furthermore most of the companies we invest in operate in areas of structural growth such as the growing incidence of diabetes, the adoption of digital payments or the acceleration of world trade which makes them less reliant on a particular economic climate”. 

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