Dalton's Leonard Charlton Bets on Defensive Euro Stocks

Dalton Strategic Partnership LLP’s Leonard Charlton is betting that European stocks, such as Associated British Foods Plc, whose profits are less tied to economic growth cycles can propel his fund to a sixth straight year of gains.

Charlton’s European Absolute Return Fund beat 99 percent of its peers as it rallied 6.6 percent in 2011, while the Stoxx Europe 600 Index slumped 11 percent, according to data compiled by Bloomberg. The fund, which invests in developed-market equities in Europe and can profit from rising as well as falling stock prices, has risen every year since it was founded in October 2006. It has climbed 7.8 percent in the past 12 months, the data show.

“We’ve a bias towards companies not too dependent on the economic cycle,” said Charlton, in a phone interview. “This year is going to be a battle between valuations looking attractive for equities and the forces of austerity and debt. Earnings momentum is going to be quite weak in the first half of the year. More companies will be missing estimates than beating them.”

The Stoxx 600 rallied 3.6 percent last week as gauges of manufacturing from China to the U.S. and the U.K. rose and a report showed that American employers added more jobs last month than economists had predicted. The European equity benchmark has rallied 23 percent from last year’s lowest level as the European Central Bank boosted lending to banks and U.S. economic reports exceeded estimates.

AB Foods’ Shares

Charlton has bought shares in AB Foods, the U.K. sugar producer that owns Primark clothes shops. The stock’s 10 percent rally over the past 12 months has pushed its price-earnings ratio to 13.8 times estimated profits, remaining below its 10-year average, according to data compiled by Bloomberg. Sales in the 16 weeks ended Jan. 7 were helped by “particularly strong trading” during the holiday season, the London-based company said on Jan. 19.

“AB Foods benefits from the tightness of the consumer and it’s not expensive,” Charlton said in the interview on Feb. 3.

The money manager is also buying D’Ieteren SA and BG Group Plc. D’Ieteren, Belgium’s biggest car dealer, trades for 8.8 times estimated earnings, below the multiple of 10.9 for the Stoxx 600 and too cheap for its forecast profits, according to Charlton. BG Group Plc may be a potential target for companies doing mergers and acquisitions, he said.

“The market’s underestimating the quality and scale of the business and it might be a takeover target,” Charlton said of London-listed BG Group. “If you want to get a foothold in Brazil, this is a company you should be buying.”

Charlton joined Dalton from GLG Partners in 2006. Dalton manages $2.5 billion.

So-called absolute-return funds involve the fund manager making long bets on stocks that will rise and shorting shares that they believe will decline. Charlton declined to say which shares he was shorting.

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