GAM: The stocks that make this fund a winner

Niall Gallagher, manager of GAM Star Continental European Equity fund, tells us what it takes for a stock to make it into his portfolio, and which shares he's been buying and selling recently.

Please outline your investment approach to running European equity strategies?

We run a focused stock-picking portfolio, typically holding between 30 and 35 companies in the fund at any one time. We are long-term in our approach. Many of the holdings I've held in the fund for very many years. We tend to like to buy businesses with high returns and capital employed, very solid moats around the business, and an ability to reinvest and grow and create more wealth for our shareholders.

Which stocks best exemplify your approach?

A very good example of a stock that we think fits our investor approach is Inditex, which might be better known for its main retailer brand, which is Zara. 

This is a business that began in the 1970s in Spain with one shop. There are now thousands of shops right across the world. What we like about Zara and Inditex is the uniqueness of the business model, which has at its heart this ability to produce clothes very quickly and allowing it to meet the fast fashion model. That tends to mean that Zara stays on-trend over the course of a season and doesn’t tend to have to discount its clothes heavily toward end-of-season sales. 

The company has also invested very heavily in technology which means they’re able to provide online as well as their physical stores and mix the two of them up in a way that really benefits the consumer. 

How has your fund performed over the last few years relative to its objectives and peer group?

The fund has outperformed the market over all of the time periods in recent years. The very long-term track record of the fund is very competitive. We haven’t done quite as well as we would’ve liked to over the last few years but we have outperformed the marker as a whole. 

I think many of our companies, some of our longer-term positions, have been through a period of treading water after some very strong years. We expect them to do well again. They're showing signs of that and we think that, actually, the next few years the fund will be very strong.

What is your current market outlook and key themes you are considering?

We're very positive on the prospects of the European economies. The European economies had a very slow recovery from a very deep recession following the Eurozone crises and the global financial crisis a decade ago. So, we think there are a lot of aspects of the economies which are cyclically-depressed. Therefore, we think businesses, particularly in construction or house-building or the supply of building materials, offer us a very good prospect. 

More broadly, we are positive on the global economy, as well, and there are a number of secular themes in the portfolio such as those consumer stocks exposed to the secular growth in the emerging market middle-class consumer, as well as businesses that are well-placed to benefit from consumers shifting their spending from the physical world to the online world with some of our eCommerce holdings. 

Could you talk us through some of your recent trades? What’s in and out of the portfolio?

One of our most recent acquisitions in the portfolio is the Italian online bank and financial planning network, FinecoBank SpA. 

Fineco is one of the largest planner networks in Italy with several thousand planners. It is a business that is benefitting both from its leading-edge technology in online banking and online fund selection and in online broking, combined with the financial-planner network, which allows households to have their entire household financial savings managed with advice. 

The business has none of the legacy issues of many of the banks and we think it is very well-positioned for the shift in household savings we’re seeing in Italy from bank balance sheets into advice and planner networks.

An example of a sell is we recently sold our position in Mediaset Espana Comunicacion SA, which is one of the Spanish free-to-air broadcasters or the Spanish version of ITV. 

We bought this business several years ago because we expected to see a pickup in advertising revenue in Spain as the Spanish economy recovered, which did occur but, unfortunately, what we began to observe over the course of the last year or so was that many of the gains in digital media, particularly the greater use of data by companies, the advances of people like Netflix were beginning to chip away at their audience and their potential to sell advertising. So we thought for that reason this business probably wasn’t going to prosper over the course of the next few years.