Despite the recent market rally, European shares remain cheap and unloved. As the market has continued to fall out of favour, the last five years has proven to be an extremely difficult time for European investors. It is clear market uncertainty remains as demonstrated by the recent Italian elections. As a result, European equities are currently deemed to be one of the cheapest assets globally, offering the potential to rise as policy makers continue to respond to the region's problems.
Feras Al-Chalabi, manager of the CF Odey Continental European Fund, believes we have reached an important inflection point where the most robust companies have battled through and survived these economic difficulties, and are now positioned to outpace the competition over the coming decade. In his view, essential restructuring is afoot. The dominant players have successfully expanded their market share and squeezed out their weakest competitors. As this excess capacity is withdrawn, this marks a key point for the fortunes of the remaining businesses left to collect profit and market share.
Feras Al-Chalabi believes the airline industry is going through this process. In 2012, a number of European airlines lost money, while current portfolio holding, Ryanair, made significant profits. Furthermore, the company has increased its market share from 8% in 2007 to 12% in 2012. Indeed, several European airlines have recently withdrawn from the industry, providing Ryanair with further opportunity to expand their operations.
Feras Al-Chalabi has structured the fund to be split between three groups: category winners, special situations, and recovery stocks. Ryanair is one of these 'category winners' where 50% of the portfolio is invested. This portion consists of what he believes are best-in-class companies competing on an international level, aiming to win market share as they consistently try to compound their earnings.
'Special situations' makes up 20% of the portfolio and consists of what he considers are unique companies with individual quirks, setting them apart from the competition. Stock holdings include media companies, Sky Deutschland and Vivendi, and German property firm, Tag.
The final 30% of the fund is invested in 'recovery' stocks. These companies are in distressed industries which are slowly gaining market share, or have, for instance, been consolidating parts of the business in order to reduce costs. Companies such as household appliances manufacturer, Electrolux, fall into this category. The business has undergone a period of consolidation and Feras Al-Chalabi believes they could do well due to the limited life of its products, including kitchenware, which usually requires replacement after a number of years. The fund currently has a concentrated portfolio of 47 stocks, meaning each will significantly impact performance, though this does increase risk.
Feras Al-Chalabi works alongside a well-resourced team at Odey Asset Management. In our view, he has developed extensive knowledge of the industries in which he invests and we believe this could translate into good long-term returns. He has, however, been through some setbacks and in the past, performance has displayed periods of volatility. We continue to monitor the fund for more consistent performance. In the meantime, it does not feature on the Wealth 150 list of our favourite funds across the major sectors.
Key features/Key Investor Information Document for the CF Odey Continental European Fund
