Q&A: Why Hambro's Stuart Mitchell Is Bullish on Europe
Does the recent rally in European stocks mean the bear market is over? Stuart Mitchell, a director at London's JO Hambro Investment Management Ltd., thinks so. As the manager of the $120 million JOHIM European Fund, aimed at individual investors, and the $300 million Charlemagne Fund, a hedge fund specializing in Europe, Mitchell is shifting money out of cash and into stocks. Mitchell, 38, joined JO Hambro in 1998, after 12 years at Britain's Morgan Grenfell Asset Management. The mutual fund rose 63% between its launch on Dec. 23, 1998, and Nov. 5, while the hedge fund was up 52% from its inception on June 1, 1999, through Oct.31. This year, the mutual fund is down 7% through Nov. 5, and the hedge fund is down 10% through Oct. 31, while the FTSE World Europe Index is down 17.5% through Nov. 5. London correspondent Kerry Capell spoke with Mitchell recently.
Q: Why have European stock markets been taking such a beating?
A: The insurance companies here are too heavily invested in equities. Likewise, a number of pension funds have become substantially underfunded, and they have had to move out of equities and into cash and bonds. They are such big investors that when they sell, they take the rest of the market down with them. The other big problem is that European markets, outside of Britain, are still very illiquid, so sell orders can have a disproportionate effect. When the U.S. goes down 1%, Europe drops 3%.
Q: What is Europe's economic outlook?
A: It's better than most expect. We see moderate growth and inflation remaining low. While some worry that Europe will slide into recession because fiscal policy is unreasonably tight, I think the European Central Bank will change its stance and start to cut rates. In Europe, there are not the same economic imbalances as in the U.S., such as high levels of corporate and consumer indebtedness.
Q: Is the recent upswing in European stock markets sustainable?
A: European shares are the cheapest they've been in the last two decades, trading at about nine times 2003 cash flow, compared with 12 times in the U.S. We are rapidly reinvesting our cash. Last month, we had 70% of the mutual fund in cash, but we thought investor pessimism had become wholly irrational. We started buying shares again, and we now have about 50% in cash.
Q: What's your investment approach?
A: It's very much bottom-up, focused on individual stock selection. I passionately believe that markets are incredibly inefficient, so the best way to make money is to get out on the road and see the companies. We avoid startups and favor established companies that dominate their industry. We look very closely at the management team. We like companies where the managers have substantial equity in the business, companies that have consistently outperformed the competition, introduced more products, grown faster, and have tighter control over costs than their rivals.
Q: What stocks are you buying?
A: We took large positions in Zurich Financial Services and Reuters recently. Both are troubled companies, but they have tremendous franchises, and their shares are unreasonably cheap. After completing a recent rights issue, Zurich has sufficient capital to satisfy all its solvency requirements and still grow its business. And although Reuters has been losing market share to Bloomberg, it is starting to fight back very hard. We also have been buying Nokia.
Q: What will it take to convince retail investors to start buying again?
A: The market will have to go up a further 30% to 40% for people to go back in again. So many investors, especially in Europe, have lost so much money that they may never invest again. For many Europeans, this was their first experience in the stock market. But at the end of the day, the small investor isn't moving the market. It's what the big insurers, pension funds, and hedge funds do.