Eric Bendahan is relishing the new-found freedom that comes with establishing your own firm and believes that fund selectors also appreciate the advantages.
‘We are not related to a group that can be seen as competing with our main clients. This independence is something that tends to be appreciated by our target audience,’ says the Citywire A-rated manager.
Bendahan set up Eleva Capital at the beginning of last year, following a nine-year stint at SYZ Asset Management. The move has a very positive precedent, in that he follows in the footsteps of Citywire AA-rated Nicolas Walewski, who left the same company in 2005 to found Alken Asset Management.
Walewski’s parting gift to Bendahan was the OYSTER European Opportunities fund, and by the time Bendahan left he had grown the strategy to €1.7 billion. He also ran the OYSTER European Selection fund, and was handed a third, which was a family business-focused version of this strategy, in 2014.
During this time Bendahan established himself as a favourite among fund selectors thanks to his stock-picking style, which modulated between deep value and growth investments.
His decision to move on in September 2014 was therefore big news within the industry. SYZ recruited Franklin Templeton’s outperforming duo Michael Clements and Claire Manson as his replacements, but they couldn’t stop investors from following him out the door.
Bendahan launched the Eleva European Selection fund in January 2015,and has already attracted €708 million from those seeking to benefit from his ability to swiftly switch styles and adopt a growth or value stance ahead of wider market moves.
Their faith has already been rewarded: since launch, Bendahan’s fund has returned 11.1% compared with 9.6% from his chosen benchmark, the STOXX Europe 600 NR, and 8.8% from his Citywire-assigned benchmark, the FTSE World Europe TR EUR.
So what other positive factors does Bendahan feel this move has brought to his fund management potential? The biggest positive change he mentions is the increased freedom that comes with running your own show, allowing new funds to be rolled out more speedily.
Since this interview he has launched a long/short version of his fund. He also champions the possibility of acquiring stocks that would out of bounds for other managers.
‘Setting up new funds is relatively easy,’ he says. ‘You have three months between the decision and the official launch, it would take longer in a larger company. Also, we are able to look at different companies and can invest in smaller names that are not necessarily in everyone’s portfolio.’
Bendahan mentions German chemical firm Covestro, which was spun off from pharmaceutical giant Bayer and has gone on to develop the footballs used in the FIFA World Cup and UEFA European Championship tournaments since 1986.
‘This has very high quality chemical assets, as well as a high cash flow yield, which we view as being very attractive,’ Bendahan says.
In December he also invested in Irish packaging company Smurfit Kappa, which he believes provides a high return on capital employed and, like Covestro, has a high non-cyclical cash flow yield.
Smaller, relatively unknown firms like these are one of the fund’s selling points, but Bendahan is quite happy buying into more well known businesses too. He has a 2.94% holding in Nokia, while his largest single position is a 3.16% stake in Vodafone.While Bendahan owns some household names, he says his fund stands out from the crowd and differs significantly from its benchmark, the aforementioned STOXX Europe 600 NR, across sectors and countries.
‘Our active share is 90%, so there is clearly going to be a material difference between what we have in the portfolio and what’s in the index. We have 49 holdings at the moment, so it is concentrated, but not all of those names have a high weighting in the index.'
'We have a structurally high active share which can translate into big differences in terms of geography, portfolio composition or sectors,’ he says.
One region where the fund differs is France. As a Frenchman who has been living in London for a decade, Bendahan has made his native land the second largest country allocation in the fund at 19.3%, after his adopted UK home, which stands at 24.8%. In these areas he has selected businesses which are not sensitive to current economic headwinds.
‘I am not sure where the economy is going, but I do know that the French population is ageing. For this reason I’ve picked out French nursing home operator Orpea. I believe that we are at a stage in the economic cycle where there are some attractive names like this listed in France, which don’t have a cyclical bias,’ he says.
Along with smaller, lesser-known French names, car maker Peugeot is the largest French company in the fund at 3.13%. Bendahan also has 2.84% allocated to French banking company Société Générale, which is currently the portfolio’s sixth largest holding.
Germany is another country where Bendahan is swimming against the tide. At 11% his fund is currently underweight against the benchmark’s 13.5% allocation and he disagrees with other fund managers who believe this economy is one of the best performers in Europe.
‘It looks like a crowded trade and the euro will not continue to depreciate forever. I am also concerned about China’s deflating investment bubble, so I am not keen on getting some traditional cyclical exposure in Germany.
‘We’ve had a bit less this year than in the past and we continue to be underweight because we are not that optimistic on the global economic cycle,’ Bendahan says.
Nevertheless, he has joined his peers in one German venture. ‘For the first time in probably 15 years I have invested in Deutsche Bank because of the management changes that took place and the very low level of current valuations. Deutsche Bank is not that domestic these days,’ he says.
Bendahan does not take much more risk than his peers
Bendahan describes himself as a bottom-up stock picker and likes names that will deliver regardless of economic events and geographical location.
He splits his allocations into four themes: family-owned businesses; differentiated businesses in mature industries; companies undergoing significant management or industry changes; and companies with diverging valuations between equities and credit.
‘We like the differentiated business models in mature sectors. You often have fantastic companies with very attractive multiples because these are driven down by the fact that they belong to a sector that people dislike.
‘Financials, for example, was a difficult sector on a top-down basis, but it was a very strong theme in bottom-up terms for us last year, with a lot of names that have appreciated by 50% plus,’ Bendahan says.
Financials is the largest sector allocation in the fund at 24.8% and the manager believes that these companies’ dividend potential is underestimated. As well as smaller holdings in some of the so-called ‘challenger banks’ in the UK, such as OneSavings, Bendahan holds 3.03% in Grand City Properties, a financial company specialising in the German property market. This firm was the top contributor to the fund in December.
Away from financials, which has seen him add periphery exposure to the likes of Spain since the fund’s launch, consumer discretionary is the second largest sector in the fund at 11.8%.
Elsewhere, he feels a number of more popular sectors are overdone. ‘I’m significantly underweight consumer staples and healthcare because the valuation of a lot of those companies is unproven,’ he says.
Another sector that the manager is underweight in is energy. Bendahan has allocated 3.6% to this space versus his benchmark’s 5.4%. ‘I’d like to increase exposure this year but I want to see more momentum in the oil price before buying in,’ Bendahan says.
Warming up to solar
One form of energy Bendahan is positive on is renewables. ‘We invested recently in Scatec Solar, a Norwegian solar park developer, which could potentially quadruple in size in the medium term.
‘There have been a lot of technological enhancements, most of the companies are trading at a depressed valuation and, to us, this represents an opportunity to invest in a technology which we find exciting.’
Bendahan says he favours companies like Scatec Solar on the basis of the growth they are generating. He likes to split the fund between growth companies such as this and value punts such as Vodafone.
‘If you look at my management over the last five to 10 years, I have tended to be quite overweight growth but now we are finding more ideas in the value space. This has been consistent for us since we started Eleva. We were equally split initially but it’s 63% value and 37% growth today.’
Allocations to value and growth companies are flexible but Bendahan likes to limit the number of names he invests in.
‘Our average portfolio structure will tend to be 40-45 high conviction stocks with an average weight of 2.5%. We are not necessarily looking for single-name concentration. Our biggest position is around 3.2% and we don’t like to go above 4.5-5% in a single name.’
A high concentration of holdings could make the fund susceptible to volatility and Bendahan acknowledges that he cannot control the way stocks behave, so he is careful not to put too much into any single name that he owns.
‘I think we have to be humble, humility is an important factor. The incidents that hit Volkswagen recently, or even BP a few years ago, happen every now and then. When they do, you are relieved you didn’t have 7%, 8% or 9% bets on one company.’
Along with this careful approach, Bendahan pinpoints another two things that have contributed to his success. ‘We are opportunistic and pragmatic, our clients know that we are not are going to be stuck in one particular style.’
Time will tell if he measures up to the trailblazing success of his fellow boutique builder Nicolas Walewski, but he’s certainly on the right track.
The article originally appeared in the February edition of Citywire Selector magazine.