Essentials: European value strategy in three minutes

23/06/2016

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​In this ‘Essentials’ video, Nick Sheridan outlines his value-focused European equities strategy, designed to identify larger European companies listed in, or operating in, core European markets. His differentiated process focuses on businesses with stable margins and high barriers to entry, and which he believes have been fundamentally mis-priced by the market.

Summary

Investment process

Value investing has its roots in the 1930s and is reliant on the compounding effect, where successful businesses reinvest their earnings to generate higher returns in future.

Investment universe

Nick takes more of a capital growth approach with the Euroland strategy. He tends to avoid the more peripheral markets in Europe, reflecting the quality of publically available information on companies.

Favoured stocks

Nick likes to buy businesses that can compound their earnings and compound their cash flows, with very stable margins, big barriers to entry, but where the market is inappropriately pricing the company – either through the misperception of a particular issue, or a risk of uncertainty.

Sell discipline

Nick maintains a strong sell discipline, triggered by a number of relevant factors. For example, he will usually sell on a profits warning, because that tells him the company is probably being run with an inappropriate capital structure. He will sell when stocks reach a point where they are no longer discounted, given their potential for future growth (effectively the reverse of his investment process). He also tends to be more active (in terms of both buying and selling) when markets are volatile.

Investment style

In aggregate, Nick will tend to have portfolios with a price/earnings ratio below the market average and a return on investor capital that is much higher. He will also tend to have an operating margin that is higher than the market. What he is looking for with any particular company is the ability of that company to reinvest substantial cash flows back into the business, and grow its earnings profile over the long term. He tends to find that the compounding effect of money being reinvested by companies increases the likelihood of capital appreciation in future.

Benefits of Europe

In Nick’s view, Europe continues to offer investors’ opportunities that are not available elsewhere, due to the nature of the companies and the quality of regulation. Furthermore, considering Europe as a universe, the region remains one of the most attractively priced developed markets in the world.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its us.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Euroland Fund

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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