By ED BONSOR
We were delighted to host fund managers Stuart Mitchell of S.W. Mitchell and James Salter of Zennor in our offices on 23rd March for a lunchtime discussion on their respective strategies.
Although their geographies (Europe and Japan respectively) may be far apart, their approaches bear resemblance. Both European and Japanese capital markets have suffered prolonged bouts of neglect as equity flows headed to ETFs and into America. Relative valuations reflect this, as captured in the below graph from Goldman Sachs.
Source: Goldman Sachs
The orange chevron marks the price to earnings ratio of each zone or geography and the blue shaded box maps the interquartile range (the area of valuation between 25% and 75% measurements over time)
As we can see, the US is the king pin with Japan, Asia ex-Japan, Europe, Emerging Markets and the UK representing good relative value.
As the US rose over the two decades that have elapsed since the TMT bust, the result has been a prolonged derating across most parts of their respective markets, despite enormous progress at the corporate level. It is this legacy of investor apathy that has thrown up enticing opportunities for investors revisiting today.
James Salter, who previously worked at Polar Capital, founded Zennor, a specialist manager in Japanese equities. His co-portfolio manager is David Mitchinson. The strategy has performed well with a portfolio not representative of the benchmark. James reflected on his past affection for deep value and feels he has evolved to give greater credence to growth factors and catalysts.
His current portfolio consists of 38 names and is enjoying the tailwinds of corporate reform and shareholder activism. Broadly speaking, the portfolio breaks down into three categories: overlooked assets, where the true value of assets is hidden, mispriced cashflows, where companies cash generation is mispriced by the market and finally, under earners, companies that have higher earnings potential than is reflected. James prefers to engage rather than confront the management teams they work with. Analyst coverage across Japan is thin, and even sometimes absent for many of the names they invest in, and thus the team operate in fertile ground for a more active approach to investment. In terms of risk, James noted the Bank of Japan does risk slipping behind the curve on their monetary tightening pathway – the tremors in markets last summer offers up some clues for just how entrenched the world’s capital flows have been in recent years.
Stuart Mitchell is a stalwart of the European equity universe. He is long established in his area of expertise with a strong and long-term track record. His natural hunting ground over the years has tended to be Germany and France. The new Merz government in Germany intends to ratchet up spending on infrastructure and defence represents a paradigm shift for growth in the region. Germany’s total defence spend is set to rise from €52bn a year in 2025 to €162bn by 2029. Similarly, federal investment spending is expected rise from €52bn in 2024 to €120bn annually. This will provide enormous stimulus for the domestic economy. It is perhaps no surprise to see Germany’s two largest banks as the top two names in the portfolio. Other conviction ideas include Roche, its business too heavily discounted in the current market, and Volkswagen, rationalising production and set to see improved margins. Stuart is sceptical of ‘bubble stocks’ and has stayed away from AI-related stories, nor is he a fan of the GLP-1 enthusiasm for names such as Novo Nordisk.
James and Stuart are both exemplary examples of specialist managers whose strategies we hold across our mixed asset and bespoke client portfolios. Their ability to identify value where others see neglect, combined with their hands-on experience navigating complex local dynamics in their respective markets allow us to offer access to opportunities that are often overlooked broader global investors. It is this blend of expertise, conviction, and independent thinking that makes our partnership with James and Stuart so beneficial to our investors.
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