Morningstar Awards 2012
Winner of Europe Large-Cap Equity Category
BNP Paribas L1 Equity Europe Growth Classic D
Daniel Hemmant is a Senior Portfolio Manager for European Equities at BNP Paribas Investment Partners. He has 20 years of experience in the asset management industry.
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Morningstar: Could you highlight any major changes you made to the portfolio over the course of 2011? Were there any particular holding that drove the fund’s performance for the year?
BNP Paribas Investment Partners: We added seven stocks to the fund during the course of 2011 (out of a) portfolio of c.50 and funded this through the sale of nine. In general the beta of the portfolio has been below that of the market and we have worked hard to eliminate this unintended directional bias. This has been facilitated by the, at times, extreme negativity of sentiment in the market which has thrown up good buying opportunities in Cyclicals and Financials which account for six of the seven stocks purchased. We have moved from a neutral position to a small overweight of cyclical sectors.
That said, attribution shows that 80% of the outperformance came from stock selection and the ten biggest contributors were all held at the start of the year. Eight of these were still held as of the end of 2011, with the two exceptions being Autonomy and Synthes which were both acquired by US companies. This certainly helped, but the contribution from outperforming stocks was broad-based and actually the biggest contribution at a sector level by some margin was Industrials (with Financials the worst).
Morningstar: What is your economic outlook for 2012 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
BNP Paribas Investment Partners: We actively try to minimise the impact of common factor risk on the portfolio; so we keep market direction/sector/FX/regional bets low and concentrate on driving performance through stock selection.
That said, we have been in a macro-driven risk-on/risk-off market which means that the market tends to oscillate far more than the fundamentals. So a lot of our stock specific research is focused on areas of the market that are out of favour for reasons that we would regard as transitory.
Lastly, we buy stocks on a three to five year view and this is reflected in a low level of portfolio turnover. So the outlook for 2012 is really not a major consideration. That said, we do not expect a particularly supportive macroeconomic environment, so we remain focused on what we would define as quality stocks – those which operate in markets with a good industry structure.
Morningstar: Can you comment on the risks facing the global economy, including the European debt crisis and the headwinds facing the Chinese economy? How do these risks affect your investment decisions?
BNP Paribas Investment Partners: Like most people, we are concerned about the risks in the current economic environment, some of which are general (will Chinese growth slow significantly) and some more specific to Europe (what will be the policy response on the Euro). However, the very fact that a lot of these concerns are pretty consensual suggests that they are probably in the price.
In general, we are interested in situations where there is guilt by association. Concerns about a particular sector tend to drag all associated stocks down. That provides the sort of entry point that we look for to get into the sort of companies that we like. Buy your straw hats in winter and your overcoats in summer!
Morningstar: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?
BNP Paribas Investment Partners: We have a team of eight analyst/PMs and a dedicated risk manager. All team members write in-depth investment cases on stocks which are then subjected to peer review by the team to try to ensure that all the risks are understood before an investment decision is taken. The decision to add a stock is taken collectively, as is the decision as to what stock should be sold to fund it. As such, there is a very high degree of commonality across all the portfolios that we manage. There is a very flat structure and a collective ethos.
The core of the team (five of the members) has been together since 2006 and was originally responsible for running ABN Amro’s global equity funds. The team has managed European equity funds since the merger with Fortis Investments in 2008.
Continuity is important and there is no intention to change the current team structure or personnel.
Morningstar: Can you highlight any areas where you feel that the investment team or the company can improve upon?
BNP Paribas Investment Partners: We’ve been doing a lot of work on risk control and how it informs positioning and active weights - particularly in terms of diversifying away specific sources of common factor risk when they become too large; and also the use of risk-control to flag up current holdings that need to be revisited, typically because they screen as consensual or overvalued.
