Franklin Templeton Investments fund manager Edwin Lugo is buying Greek, Irish, Italian and Spanish stocks as other investors flee equities ravaged by peripheral Europe’s debt crisis.
More than 12 percent of the 306 million-euro ($436 million) Franklin European Small-Mid Cap Growth Fund is devoted to Irish companies, including C&C Group Plc (GCC) and Irish Continental Group Plc. (IR5A) Greek retailer Jumbo SA (BELA) takes up 4.2 percent, according to factsheets. Lugo, who beat his benchmark by 41 percentage points between 2002 and 2011, bought Spanish companies last month and is considering purchasing Portuguese stocks, he said in an Aug. 31 interview.
“We’re trying to run into areas where people are running away because where you find a high return is where you see a lot of distress,” Lugo, who is based in New York and helps oversee $2 billion, said. “We step back and try to stay away from the noise because we’re long-term investors.”
Bailouts, austerity plans and surging bond yields have prompted investors to flee markets in Spain, Portugal, Italy, Greece and Ireland, also known as Europe’s peripheral nations. Equity indexes in those five countries have fallen 19 percent on average this year, Bloomberg data show, reducing prices for buyers betting an economic slowdown may not be as steep as estimated.
More Than Doubled
The Franklin small- and mid-capitalization fund is down 19 percent in euros this year, compared with a 14 percent decline for the MSCI Europe Small Caps Growth index, according to Bloomberg data. The fund more than doubled between 2002 and the end of last year, beating the MSCI index by 41 percentage points, the data show. The fund has been in the top 11 percent among peers in the past five years.
European authorities are wrangling over measures to combat the euro-area debt crisis. Demands by Finland for collateral as a condition for contributing to a second rescue package for Greece has triggered other countries to seek the same conditions, threatening to delay the plan.
“We just entered Spain and are looking at opportunities in Portugal,” said the fund manager, declining to elaborate on which stocks he purchased or is considering buying. The fund’s latest data, valid as of June 2011, don’t include any holdings in the Iberian peninsula. “The companies we’re buying will do well regardless what happens in Europe over the next months.”
Jumbo, Greece’s biggest toy retailer, has declined 71 percent from its peak in July 2007. Dublin-based C&C, a manufacturer and distributor of branded alcoholic drinks, is trading at about a fifth of its value in January 2007. Irish Continental, which sells holiday packages, has lost about 45 percent of its value since October 2007.
Spain’s IBEX 35 Index is trading at 9.3 times the expected profits of its members, according to Bloomberg data. That is higher than the 8.8 ratio for Germany’s DAX Index. The price-to- earnings ratio for Greece’s ASE Index is 10.5, the data show.
Among other companies in the fund, Lugo holds shares in Prysmian SpA (PRY), a telecommunications and energy-cable company based in Milan, stock in Irish distributor DCC Plc (DCC), which has fallen 19 percent this year, and shares in Beneteau SA (BEN), a French yacht maker which has lost 29 percent in 2011.
Norway’s oil fund has also increased its investments in small-sized companies in debt-burdened European countries such as Italy and Greece over the past 18 months, Yngve Slyngstad, the head of the $544 billion fund, said on Aug. 30.
The Euro Stoxx 50 Index last month reached the lowest valuation relative to estimated earnings since March 2009, when a one-year rally began.
“Over the long run, Europe will recover,” Lugo said. “Overall, peripherals are very, very attractive. Will Greece recover? It will take time, but there’s a high probability that that will happen.”