The emergence of a well-established German replacing an outgoing Briton in a high-profile job was the talking point of English football over the autumn.
As fan favourite and former Borussia Dortmund coach Jurgen Klopp has occupied column inches in his new role at Liverpool, the move has some parallels with management changes in the investment world.
In July 2014 Franklin Templeton announced its head of European equity, Uwe Zoellner, was replacing then Citywire AA-rated Michael Clements on its blockbuster Franklin European Growth fund, which was then soft-closed to new investors.
For Zoellner, the challenge was to take over the then €3.1 billion fund without undoing the previous manager’s outperformance. This task was made all the more difficult by the fact that investors were pulling out of the fund and following Clements, leaving the portfolio two-thirds lighter at its current €1.01 billion.
The Frankfurt-based manager says he made no major changes in the immediate aftermath. ‘The fund’s basic philosophy hasn’t changed at all, we are still looking for companies of high quality.
‘Quality for us does not mean a defensive name. We own quite a few cyclical companies but we look for businesses with a strong balance sheet and a competitive advantage.’
This hasn’t saved Zoellner from a tough start to his tenure. In the period from the end of July 2014 to the end of September 2015, the fund lost 1.36% versus a 5% rise by the FTSE World Europe TR. On a one-year basis it has returned 0.8% against the average manager’s 4.97% and the index’s 3.31%.
Zoellner hasn’t overhauled Clements’ process, but he and co-manager Robert Mazzuoli have certainly stamped their mark on it. ‘When I look at the portfolio, 41% is invested in names we bought after Mike’s departure, although the sector composition hasn’t changed much at all,’ Zoellner says.
Stock picking pain
Industrials and consumer discretionary stocks remain a focal point for the fund, accounting for 31.6% and 22.7% respectively. However, these two cyclical sectors weighed heavily on the fund during a period of macro headwinds.
‘We focus on the single-stock stories and we have seen market moves which are completely unrelated to stock specifics, be it up or down,’ he says. ‘That can be frustrating in the short-term, but we follow a long-term approach and take a view on how companies are likely to perform over the next three-to-five years.
‘When high-level macro events play a role then it can mean that everything related to emerging markets is down for a month, followed by everything related to energy or the eurozone economy, and it is sometimes fairly random.’
However, Zoellner's long game has allowed him to see through the impact of volatility in core Europe, particularly around the time of the Chinese correction over the summer, and to add to select positions he expects to outperform over three to five years.
For a growth investor though, Zoellner shows a considerable appetite for value bets. He cites the bulking up of positions in German groups SAF Holland and Braas Monier Group as examples of capitalising on stocks which he believes were unduly beaten down.
‘If the company delivers its free cash flow and its earnings, and we get it at an attractive price, then this will pay off and that’s the whole principle of long-term fundamental investment, that you don’t get carried away with the short-term moves.
‘This is where people start to sell for cyclical concerns and we had a chance to get a good stock in the market at an attractive price. If we can buy at the right price, and believe in the potential, then we hold onto it.’
EM to re-emerge
Another stock addition which has been overtaken by macro matters, Zoellner says, is Ashmore Group, the emerging markets specialist asset manager, which the fund has held since early 2014.
The company, which accounts for about 3.5% of the fund, has endured a tough year but Zoellner believes emerging market powerhouse China has the ability to return to an even keel and associated stocks will stabilise as a result.
‘We have identified some underlying structural drivers which will benefit China and the emerging markets. At the moment we have a period of weakness and this is the time when we get interested.
‘Not too long ago it looked like the eurozone might collapse and yet now there is nowhere better to be. Then China, which was a poster child for everyone, faced some challenges. As always, markets overplay things.’
Part of Zoellner’s plan to ensure the Franklin European Growth fund returns to its previous strong standing is to take these macro matters on board but not let them change the fund into a momentum-chaser. He points to how he played the UK election as an example.
‘In the run-up to the elections people were quite nervous about certain sectors, especially anything property-related. In the end, our opinion was that whoever wins the election will face the same challenges.
‘There would be a need for more housing, particularly in the Greater London area, and whoever won would need the help of housebuilders and real estate agents, as well as those servicing local authorities.
‘Market nerves made the stocks quite cheap and that is what we like, as there were strong companies with good cash flow available for attractive valuations.’
Zoellner and Mazzuoli therefore increased exposure to housing group Berkeley before the election, as well as holding estate agent group Countrywide, which was reduced slightly from 4% to 3.87% of the fund over the third quarter.
‘We benefited quite a bit from the outcome of the election, but I don’t want to make the claim that two Germans were able to call the outcome of the UK election,’ he says with a laugh, which has definite echoes of the jovial Jurgen Klopp.
While Klopp has the task of bringing Liverpool back to its previous heights, Zoellner will be hoping for a similar result on his fund.
François Chauvet is founder of Paris-based risk boutique APTimum. Here he outlines how the Franklin European Growth fund compares with its peers.
The Franklin European Growth fund shares a number of similarities with other large-sized Europe-focused funds and sits in a highly populated neighbourhood of strategies operating with the same risk levels and biases. For example, the Franklin fund has a tilt towards mid-cap stocks and also Northern European investments, which is not uncommon among broad European funds at present. There is also a creeping move towards Irish and Scandinavian investments which can be seen in its allocations.Systematic risk by sector
Unsurprisingly, for a fund with such a high exposure to the UK market, almost half of the strategy’s systematic risk stems from this region on a geographic level. The UK accounts for 52% of the total risk, which is above comparable peers and highlights the fund’s clear bias. Similarly, the concentration of industrial and consumer discretionary stocks, which account for more than 50% of combined sector exposure, make up the largest proportion of risk at a sector level. However, the fund appears well-diversified across other sectors.Conclusion
The fund’s relative performance was quite impressive from September 2011 through to May 2014 and then quickly decreased. The strategy’s beta also increased in the period since December 2014, which meant the fund could no longer be bracketed alongside other European funds with an aggressive investment approach. There is an emphasis on growth, with a bias towards small and mid-cap equities coming through and that has not changed. However, the overall rating of the fund, both in terms of absolute and risk-adjusted performance, has decreased regularly since August 2014.
This article originally appeared in the November edition of Citywire Global magazine.