The firm’s European Equities Unconstrained Fund had no exposure to Volkswagen, but share prices in the auto sector were hit after the emissions scandal broke.
The fund recently sold its position in Renault, despite a share price bounceback on strong earnings, said Millington, who spoke to Fund Selector Asia on a recent visit to Hong Kong.
"[After the Volkswagen scandal] there’s big uncertainty for the whole sector in terms of extra cost to make companies whiter-than-white in regards to the regulatory positon," he said.
“Regulatory uncertainty clouds the sector. We can’t reasonably forecast where sector margins go, and the larger uncertainty is that we cannot make a call in terms of our 1-2 year stock-specific insights into Renault.
“So we'll look for something else where we can have more insight into the key [earnings] drivers.”
The fund uses a bottom-up stock-picking strategy, investing in 30-40 specific stocks rather than allocating to regions or sectors. It also does not adhere to its benchmark, the MSCI Europe.
A recent purchase was UK-based Ashtead Group, a construction equipment rental company.
The market has linked Ashtead with slumping global construction, but Millington believes there are company-specific factors that suggest otherwise.
“Ashtead’s [equipment] fleet is new, and the company is taking away huge marketshare because competitors don’t have the balance sheet strength to rejuvenate their fleets.”
The bulk of customers are in the US, where the construction industry is increasingly renting equipment. “Ashtead is growing over 20% topline and the US construction market is going forward. The market doesn’t think that’s sustainable, but we think they are wrong.”
As for sector exposure, which is driven by bottom-up stock-picking, the portfolio now has a higher weighting (neutral) to European banks than the underweight it had two years ago. Danske Bank, for example, is just over 4% of the fund.
“In Europe the economy is starting to grow and some better managed banks are in a position with stronger capital ratios than a few years ago. Banks are in a positon now to return more capital to shareholders or start to grow the loan books, which the market is still not ready to pay for, given past experience.”
He believes pressure on earnings from low interest rates is shorterm, and will ease in the next 12 months.
Eighty percent of the risk in the fund is stock-specific, Millington said. Macro-economic risk is reduced at the fund level. For example, the firm has exposure to RyanAir and German travel company TUI Group.
“That gives us thematic exposure to generic issues that affect airlines, such as oil prices and terrorist attacks,” he explained, adding that they are unlikely to add another airline.
Thematic risk is mitigated at the fund level by using other stocks in the portfolio, he said.
The fund’s position in French oil company Total, for instance, offsets some oil price risk from RyanAir.
However, no company, no matter how well it is screened by investment specialists, is insulated from macro events. Slowing GDP growth in China, which is linked to slowing growth in other Asian economies, could hit the earnings of European exporters.
Millington admitted slowing growth is affecting the earnings and the rate of product rollout for some European companies, particularly in the luxury goods sector. “But China is a place they want on 5-20 year view. It’s a massively attractive market for growth opportunities and there is no [issue] of European companies wanting to pull back from China.”
The fund's three-year performance vs its benchmark index and vs its sector