DNCA is one of a multitude of French boutique asset managers although this firm’s expertise caught the eye of Natixis Investment Managers who acquired it in 2015. Natixis runs a multi-boutique model which gives its clients access to various investment styles, from DNCA’s high conviction fundamental stock picking to smart beta pioneers Ossiam.
The firm’s Invest Value Europe product may not have had a great 2018, similar to most long only equity funds but its manager Isaac Chebar (pictured) is a patient man and with a portfolio of just 40 stocks is committed to the picks he makes. Some of the fund’s holdings may seem intriguing considering Mr Chebar is Paris-based, for instance UK FTSE 250 Babcock, the defense company. Last year this company was embroiled in a bitter row when little known trading company Boatman Capital put out a bear note suggesting that the firm was in danger of losing large contracts with the Ministry of Defence. It was suggested that Boatman had a short position on the stock and were looking to increase their returns.
However, Mr Chebar is by no means a knee jerk manager and his belief in the £3 billion company’s fundamentals appeared to have paid off with the company being one of the main contributors to fund’s gains over the summer, a short while after the company vehemently refuted Boatman’s claims. Also given the company won a £1.25 billion contract to build the UK's new fleet of warships earlier this week (12 September) its share price has rallied bringing more gains for the fund.
While it would be fair to say that Mr Chebar’s style is cautious, his stock weightings fall between 2 and 3.5 percent, he’s not your typical ‘buy and hold’ manager when the opportunity presents itself. Another UK arms company Cobham had been languishing in the 115p share price range for a while. Mr Chebar says with a hint of mischief, “It was actually a two year investment that became a two month investment” referring to the private equity bids that came in for the firm shortly after he took a position in it, causing the stock to leap 20 percent after which he sold the stock.
One thing that the above stocks reveal about Mr Chebar’s investment style is not a fondness for weapons of war but conservative use of leverage. The portfolio’s average net debt to earnings before interest, tax, depreciation and amortisation is 1.5 times, the debt level of Babcock and slightly above Cobham’s most recent figures. This figure is regarded as a ‘sweet spot’ for many portfolio managers with 3-times net debt to EBITDA being beyond the pale for many.
Sector weightings not reflected in the top holdings
Usually a fund’s sectors weightings are found in its top holdings, not so here. According to the fund’s prospectus, its top sectors are cyclicals such as industrial goods and services and banks. However, its top holdings are a solar energy company Enel and a healthcare company Sanofi, both defensive areas.
The answer to this apparent disconnect is linked to the above stock weighting point, in that Mr Chebar has picked his top 40 companies so doesn’t want to have the majority of the portfolio in just a handful of stocks as it would diminish from his conviction in his other picks. Of course, this tactic may have obvious drawbacks, if the economy is soaring, cyclical stocks will be on fire but as each company is limited to a maximum 3.5 percent of the portfolio, defensive stocks will weigh on the performance.
Therefore this fund is most certainly cautious, investors won’t ride the highs of the full-on bull market but neither will they suffer the terrible lows of a bear market. However, this weighting range has another function and that is to handle liquidity.
“Everybody thinks that liquidity in the market is due to central bank policy. If liquidity is there at a stock level we will go up to 3.5 percent. If not 2 percent but always between that range,” says Mr Chebar. This a fairly nuanced point and concerns the difference between liquidity at the broader market level and stock specific liquidity. With extraordinary monetary policy flooding the markets with liquidity, this is great for index trackers as they are market cap weighted so the rising tide floats all boats to use a hackneyed phrase. However, Mr Chebar says that as many fund managers pick the same stocks, if they all seek to exit at the same time, it becomes “difficult”.
The Brexit and European problem
As we’ve seen Mr Chebar is fan of the UK equities market, in fact it’s his second biggest country allocation with 15.9 percent. One issue he’s concerned with regarding the UK’s seemingly imminent exit from the EU is that he will not be able to hold such a level of UK stocks for a French domiciled fund. Surprisingly, when asked which sectors he’s drawn to in the UK he mentions retail. The demise of physical retail is a well-known story with once titans of the high street falling one by one.
Again Mr Chebar’s reasoning is surprising as it is extremely simple. “Media is not going to be a growth sector again. But is TV dead?” His reasoning being that once we’re all sat “on couches watching Netflix” where’s the money going to going to come from? But he sees television manufacturers valued at just 2-times EBITDA and as these wear out and need replacing, it has inbuilt growth. This thinking may not hold true for companies such as Facebook which derive most of their revenue from advertising but once everyone has subscriptions to the likes of Netflix it seems a valid point.
With economic indicators suggesting that Europe is slowing, most equity managers involved in the region would be worried. Not so Mr Chebar. “Right now the [European] market is a behaving like a liquidity monster,” he says. He concedes that Europe is slowing though and that is putting off global investors in favour of regions such as Asia and the US. He insists that “Europe is not a lost animal”.
However, central to Mr Chebar’s thesis on why markets are slowing and discontinuing their upward ascent they’ve been on for nigh-on a decade is that “once the markets become more difficult, it will come back to fundamentals”. He views that ETFs are “sucking” a lot of money out of the market as they are net buyers of stocks. When conditions become more perilous, investors won’t be able to simply buy the market anymore. They will have to entrust their money to disciplined stock pickers like Mr Chebar whose conservative stance might not be to everyone’s taste, for instance those looking for quick supercharged returns but with a disciplined portfolio construction model in place, this fund has managed to beat its benchmark consistently.
Therefore, while this fund may not be the choice for the racy investor looking to buy a super-yacht and traverse the world’s oceans, it provides a relatively safe allocation in the topsy-turvy European equities market. Also with an average forward price-to-earnings ratio of 12.5, it has some growth dialled in for the patient.
DNCA Invest Value Europe (LU02843955984)
Fund Size: EUR 710.5 million
Fee: 1.04 percent
5 year annualised return: 3.95 percent
Top holdingsEnel, Sanofi, SBM Offshore
Net asset value growth
To read more about this fund click here
