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Winning With Unloved Europe Stocks When All Others Fall Flat

  • Equity fund beats market and gauge of region’s value shares
  • Avoiding Germany, buying U.K. grocers part of strategy success

Buying what nobody wants in Europe is paying off for Luiz Sauerbronn, whose equity fund has beaten 96 percent of his rivals this year.

Sauerbronn, an investments director at Brandes Investment Partners in San Diego, said his firm stuck to its value-picking methods even as others abandoned it for safer, defensive strategies. Brandes’ European Value Fund has not only fared better than the rest of the market in 2016, it’s also outpacing a gauge of the region’s value shares -- roughly defined as those priced lowest to earnings and assets -- by the widest margin ever.

Successful bets include avoiding Germany, buying short-seller targets like British grocers and picking stocks in unloved markets such as Greece. At a time when investors are finally testing the water for buying low after favoring growth stocks for years, Sauerbronn is preparing to capitalize on the turnaround. The Brazilian, whose firm oversees $27 billion, said that geographical distance has helped provide perspective on one of the worst starts to a year for European stocks since the financial crisis.

“It does clear out the noise and help you stay calm when everyone else is scared,” Sauerbronn said by phone. “People have somewhat given up on value at a time when value stocks are far cheaper than normal. That means there are fewer true competitors out there for us, and that’s exciting. We’re ready for the snapback, and the longer it takes the stronger it will be.”

Europe’s equity markets have struggled to push higher in the past three months as concerns about falling profit estimates and slowing global growth drown out improving regional data and a boost in central-bank stimulus. Many investors have given up on European stocks, pulling money from the region’s funds for 17 straight weeks, the longest streak since 2008. European shares rebounded on Monday following a weekly drop.

Sauerbronn’s fund is up 2.3 percent this year, versus a 6.8 percent slump in the MSCI Europe Index. It snapped up shares of Barclays Plc and Italian cement company Buzzi Unicem SpA in the first quarter, and both have gained at least 16 percent since the end of March. Other holdings include Greek real-estate firm Grivalia Properties REIC AE -- up 14 percent since a March low -- and Wm Morrison Supermarkets Plc, which has rallied 27 percent this year despite remaining one of the most-shorted stocks in the U.K.

Strategies based on finding cheap stocks have found little success since the financial crisis, with the MSCI Europe Value Index lagging the broader market every year but one since 2009. Investors in 2016 yanked $109 million from the few exchange-traded funds focusing on value in Europe, while adding $32 million to those tracking growth stocks, data compiled by Bloomberg show.

The value benchmark trades at about 13 times projected earnings, a 28 percent discount to the MSCI Europe Growth Index, a gauge of companies with a track record of increasing their profits. The relative discount has widened in the past five weeks and remains about 40 percent above the historical average, according to data compiled by Bloomberg going back to 2005. For Sauerbronn, the gap between the two investment models is now unsustainable.

“Europe’s safe companies are trading at such nosebleed valuations that they can’t possibly be safe investments any more,” he said. “Value had such a hard time in 2015, and Europe in particular -- people were looking for low volatility and for places to hide. Now the room to outperform has increased significantly.”

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