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Telecoms firms are killing their own market, say Euro equity stars

Telecoms firms are killing their own market, say Euro equity stars

Telecommunications companies lack the innovation and long-term competitive advantages found in other industries such as healthcare as they are too focused on regulations.

That is according to Citywire AA-rated Antoine Hamoir and Citywire + rated Koen Popleu, who run the Candriam Equities L Europe Innovation fund with Citywire + rated Geoffroy Goenen.

The managers, who are also named across several other European equity strategies at the asset manager, have no allocation to the sector compared with the benchmark weighting of 5.16%.

‘In telecoms it is all about regulation, which is more important. We think telecom operators hardly have a competitive advantage here due to the relationship with the regulator,’ Hamoir told Citywire Selector.

‘When you look at what is happening in mobile, it is very difficult to differentiate between the quality of network. It's all about the pricing. Look at what happened in France, which has been in deflation for the last five years, they are killing the market now with their promotions,’ Hamoir added.

Hamoir said there are some exceptions, such as Swiss-based Swisscom and UK company BT Group, as he thinks their dominance can sustain performance over the long-term.

‘There are companies that are better positioned than others, such as those that have fixed line cable assets. That adds a competitive advantage to some degree. It is enough to give them the benefit of the doubt and to give them full credit for having sustainable competitive advantages,’ Hamoir said.

Pure innovation

Away from telecoms, the managers like food technology companies, which fall in the materials sector category. It is the largest allocation in the fund at 19.98% and Irish company Kerry Group, which makes flavour enhancers, is the largest firm in the fund at 2.48%.

IT as a whole is a significant overweight, accounting for 12.99% against the benchmark weight of 4.25%. The managers recently purchased a small holding in internet fashion retailer YOOX and have a small holding in Dutch firm ASML, which is the largest supplier in the world of photolithography systems for the semiconductor industry. 

‘It is a company that, by being so innovative in the lithography printing equipment industry, will have a monopoly on the next generation of chip making machines. This is certainly a case of pure innovation where they can kill all the competition and do well on the stock exchange,’ Popleu said.

Healthcare is also a sector the trio likes, with 17.74% exposed here compared to the benchmark weight of 13.95%. The third largest holding in the firm is the Swiss pharmaceuticals giant Roche.

‘It has a strong upside. We like the new wave of products in oncology and they will take part in the new wave of the drugs in immune oncology, which is the next big thing for treating cancer,’ Hamoir said.

The Candriam Equities L Europe Innovation fund returned 45.6% in euro terms over the three years to the end of January 2016. This compares to a rise of 28.1% by its Citywire-assigned benchmark, the FTSE World Europe TR EUR, over the same period.

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