Investors with risk appetite and emboldened by the albeit patchy recovery underway in Europe might look to a proven collective fund whose managers have demonstrated an ability to spot undervalued companies and firms with earnings upgrade momentum at their heels. Step forwards the JPM Europe Dynamic (ex-UK) fund, a £233 million open-ended investment company (Oeic) on a mission to generate long-term capital growth by investing in Continental European equities.

Amiable Irishman John Baker is one of a trio of fund managers in charge of the multi-cap portfolio, unconstrained by benchmark, country, company size or industry sector and which has absolute rather than relative risk controls. He runs the portfolio with Jon Ingram and Blake Crawford, who’ve been at the asset management firm for 20, 14 and six years respectively and therefore provide the fund with stability of management and an unwavering belief in its proven process.

Stable stewardship

‘It is a team with significant longevity,’ says Baker, who follows a best-ideas approach to investing and looks for three key metrics when picking stocks. The first characteristic sought is an attractive valuation, with the managers screening for low price to earnings, price to book and enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation) ratios as required.

The second characteristic they seek out is high quality. ‘We are trying to find companies with high returns on invested capital,’ explains Baker, who also looks for businesses with positive momentum in the form of good news flow that will drive upwards earnings revisions and an outperforming share price. ‘If the street is upgrading consensus expectations, that is something we will investigate,’ chirps Baker.

‘We can find companies right across the market cap spectrum that do exhibit quality characteristics,’ he asserts, highlighting French-listed catering-to-cleaning company Elior (ELIOR:FP) as an exemplar. ‘It is a mid cap that has got probably one of the highest returns on invested capital in its sector’. But he says its good growth prospects aren’t reflected in a cheap valuation relative to peers.

Get in gear

‘The portfolio has a cyclical bias to it’, continues Baker. ‘One of our largest overweight sectors at the moment is automotive.’ One of his prime picks here is BMW (BMW:GR), the Munich-based luxury car maker benefiting from cyclical recovery in Western Europe and improving consumer confidence. Car demand has recovered earlier and faster than analyst expectations (sales rates have come in at almost double the expected rates), creating positive surprises. Furthermore, the average age of a European car is now 8.7 years, the highest it has ever been, which is incentivising consumers to take a close look at financing options for new car purchases rather than continuing to service old vehicles.

Baker also believes BMW’s grudging valuation is backwards looking and fails to reflect growth drivers including a very attractive Chinese business and electric car production which isn’t a million miles off that of Elon Musk’s stratospherically-valued Tesla Motors (TSLA:NDQ).

When quizzed on the Continental European banking sector, Baker says ‘we are underweight relative to the index, as we have limited exposure to some of the sector heavyweights. The banks that we do own, conversely, are some of the more peripheral banks.’

Names highlighted here are Bank of Ireland (BKIR:ID), an opportunity identified in early 2013. ‘It was very cheap, but we identified earnings upgrades to come through, driven by improvements in the cost of borrowing,’ explains Baker. A stock through which the fund is positioned for recovery in Spain is Valencia-based Bankia (BKIA:SM).

‘Another theme that is coming through is “creative destruction”’, says Baker, referring to the consolidation that has taken place following the tough conditions arising from the financial crisis in sectors including insurance, finance and telecommunications. ‘It gives those that remain pricing power,’ says the manager, whose fund is invested in mobile telecommunications group Orange (ORA:FP).

The Paris-headquartered telecoms play operates in a market that has consolidated down from five to four major players and has scope for further consolidation under the encouragement of the French business minister. ‘Orange is at the cheap end of the spectrum,’ enthuses Baker, who believes further earnings upgrades should follow as pricing improvements drive profits growth.

Harvesting profits

One other interesting stock flagged up by Baker is fish farm firm Bakkafrost (BAKKA:NO), profiting from improving salmon prices and growth in harvested volumes. Baker explains Bakkafrost is as a play on growing global protein consumption, driven by rising affluence and urbanisation in developing economies as well as better eating habits in the developed world, given that fish is a healthier protein source than other meats. He also points out Bakkafrost shouldn’t be affected by Russia’s import ban on EU food and agriculture products, as the company is domiciled in the Faroe Islands.

Mergers and acquisitions is a hot theme right now, though rather than blockbuster takeovers of his holdings, Baker explains that ‘we’ve benefitted from companies acquiring other companies’. He cites pharmaceutical and chemicals business Merck’s (MRK:GR) acquisition of AZ Electronic Materials as an example. ‘Merck used its strong balance sheet to acquire growth and it received an immediate 15% earnings upgrade on the back of that acquisition,’ says Baker.

John Baker

JPM Europe Dynamic (ex-UK) 149.5p

ISIN: GB00B02L5M76 (ACC)

Minimum investment: £1,000

Five-year annualised performance: 11.9%

Fund Facts

Launch date: 30/09/2004

Fund type: Open-ended investment company (OEIC)

Fund size: £233.4 million (as at 31/07/2014)

Dividend yield: 1.10%

Sector: IMA Europe Excluding UK

Top ten holdings
(as at 30/06/2014)

Company %

Total SA (FP:FP) 2.9

Novartis (NOVN:VX) 2.7

Nestle (NESN:VX) 2.6

Anheuser-Busch
Inbev (ABI:BB) 2.1

BMW (BMW:GR) 1.9

Elior (ELIOR:FP) 1.8

Telefonica (TEF:SM) 1.8

Roche (RO:SW) 1.8

Bayer (BAYN:GR) 1.8

Orange (ORA:FP) 1.7

TOTAL: 21.1%

All data as of 15/08/2014 unless stated otherwise Source: J.P. Morgan Asset Management, Trustnet, Morningstar