Paul Casson believes that European markets are very polarized, and has taken advantage of some mispriced equities.
"Anything cyclical, or exposed to the economic recovery, has shot up. Anything that is more defensive has lagged," says Casson, 36, manager of the $187.3-millionMackenzie Universal European Opportunities. "As a result, quite a valuation gap has opened. Some things that have been left behind have been unduly punished."
Utilities, and healthcare companies, for instance, have been left in the dust by energy firms and auto-makers. "There is a five-to-six price-to-earnings point difference between the two extremes, with cyclicals trading at 16 times earnings, versus 10 or 11 for the defensive names," says Casson, who is director, pan-European equities, at Henderson Global Investors Ltd. in London. "That is quite large for a [European] market that is trading at 13 times earnings."
A bottom-up stock picker, Casson last spring acquired cyclical names such as Netherlands-based ASML Holding NV, the world's largest maker of semiconductor manufacturing equipment. "It has 70% global market share, and benefits from huge barriers to entry," he says, adding that the industry was very depressed when he acquired the company last year and ASML's order book was almost empty.
The company had a lot of cash on the balance sheet, which indicated it could survive for some time. "This is a strong company, and one that understands that technology is always moving on. You [as a customer] can only use what you have for so long. The orders had to come back -- and they did," says Casson, noting that 2010 first-quarter revenues are expected to be 40% higher than the fourth quarter of 2009.
"We've been looking for winners like ASML, which will emerge stronger," says Casson, adding that the stock has doubled in the past year in euro terms. "We've got quite a few in there."
A native of Ballymena, Northern Ireland, Casson came to the investment world following a brief career as an accountant. He graduated in 1994 from Queen's University, in Belfast, with a bachelor of science, majoring in accounting, and obtained a master's degree in accounting the following year.
In 1995, Casson joined KPMG as a trainee accountant, but decided that field was not for him. "It gave me a good grounding for what I do now. But it was repetitive and there wasn't huge scope for creativity."
Casson joined Martin Currie Investment Management in Edinburgh, in 1997. He began as a trainee fund manager on the European desk, and worked his way up to fund manager. In 2001, he moved on to SVM Asset Management, also in Edinburgh, where he was manager of the SVM Continental Europe A Fund.
Casson joined Henderson in early 2006, and in April of that year officially assumed the Mackenzie fund from Stephen Peak, who had managed it from inception in 1994. Peak, head of Pan-European equities at Henderson, consults with Casson on strategy and stock selection.
Running a 53-name fund, Casson limits single holdings to about 5%. Portfolio turnover has been moderate, at 62.9% for the year ended Mar. 31, 2009.
For the three-year period ended Dec. 31, the 2-star rated fund lost 13.4%, versus an 11.3% loss for the median fund in the European Equity category. The fund took a hit in 2008, when battered banking stocks resulted in a 37.4% loss, versus a 32.6% loss for the median fund.
Casson maintains that 2009 was all about the market pricing in a recovery. "This year, it is all about delivery. Companies that can show revenue growth or a path to revenue will be rewarded. They will be the winners. The ones that can't will be punished," he says. "We think there will be more discrimination between winners and losers in 2010, based on revenue growth."
One of the names that Casson is counting on is Dublin-listed CRH PLC. A global player in the cement and building materials industry, it benefits from strategic assets such as locally quarried aggregates. "If you have a captive market within a certain radius around your quarry, that means you have pricing power," says Casson, who added to the long-time holding last summer. Since then, he's taken some profits.
"Other stocks have gone up more; that's fine," says Casson, acknowledging that CRH's stock has thus far lagged the market. "But, in terms of quality of company, market position, management, cash-flow generation and predictability of earnings, the risk-reward trade looks very good. So, yes, it will have a lower return than some oil exploration or Google-like stocks. But you're taking on much less risk. That's something we have to factor in."
