The current market volatility in Europe has its roots in the borrowing binge by consumers, says Angus Parker, manager of the $106.8-millionHSBC European. "The chickens have come home to roost after a period when a lot of consumers took advantage of cheap credit," says the head of European equities at London-based Halbis Capital Management (UK) Ltd., a unit of the HSBC Group.
"The economy might have gone into recession in 2001, but it didn't because a lot of liquidity was pumped into the system," says Parker, 37. "It has to re-balance at some point." The question is, asks Parker, whether this crisis will affect the real economy. And since there is a higher risk of a slowdown than six months ago, Parker is cautious about consumer discretionary stocks, for example. He has also underweighted UK banks because of concerns about the "bubble-like" qualities of the local real estate market.
These positions are largely the result of bottom-up stock picking, with Parker's seven-person team studying factors such as the UK banks' reinvestment rate. "To start with a view that interest rates are too high, or low, is an extremely difficult call," he says.
"If you make one call, you better be right. Whereas, our portfolio is based on 50 to 60 decisions, and getting each of them a little bit right. That's a more repeatable process."
While Parker's team uses a variety of screens to gather data on companies, the core of the process relies on taking advantage of market inefficiencies. The first source of potential investments consists of companies that are making positive changes, such as strategic reorganization, that are unrecognized.
"The market often has a show-me attitude," Parker says. "We're looking for opportunities where the market doesn't give credit for the changes. That gives us a margin of safety."
Parker categorizes these types of stocks as "improvers." One such example is BAE Systems PLC. Parker acquired the stock in 2004, after management adopted a new strategy that boosted earnings due to more lucrative contracts with domestic clients and expansion into the U.S.
"Over the last three years, you have seen the realization of this strategy," says Parker. The firm's shares recently traded at triple their 2004 purchase price.
There is also a second, larger group known as "compounders" -- companies that are already doing well and have high returns on capital, but whose competitive advantage, which may rest on patents or a unique distribution system, is not fully appreciated according to Parker's team.
In some cases, a stock may straddle both camps. Tesco PLC, a leading UK supermarket chain, is an example. It has been very stable, "yet it hasn't earned fantastic returns, since it is continually reinvesting in its business," says Parker. "Its returns from overseas assets are helping the company move to a higher level."
Born in London, and raised near Glasgow, Parker has been in the investment industry since 1993. That year, he graduated with a MA in geography and business studies from the University of Edinburgh. He began as a corporate finance trainee at Lazard Brothers, and later worked in its New York and Paris offices.
Then he spent four years in London investing in UK small companies, primarily for institutional accounts. "It was the best grounding for any portfolio manager. You can get your hands around investment situations very easily."
In 1997, Parker moved to New York and worked at Lazard Asset Management on global, EAFE and European small to mid-cap accounts. He worked closely with William von Mueffling, who taught him the importance of understanding a firm's competitive advantage and paying the right price for it.
Between 2001 and 2003, Parker returned to London and worked for Lazard. In 2003, he joined Jura Capital, a hedge fund. The following year, he joined HSBC and in September became lead manager of the European fund. Halbis, an investment arm of HSBC Investments, was created in May 2005.
In assuming the fund, Parker reduced the number of holdings to about 60. Individual positions are limited to about 3.5%. Turnover has been moderate, at 71.1% in 2006. The fund is currently rated 3-stars by Morningstar, and has been a third-quartile performer over the past three years ended Sept. 30.
Looking ahead, Parker argues that Europe remains attractive, despite the current malaise. "The last three years, the market has been strong on the back of real upgrades in earnings, although there hasn't been any significant multiple expansion."
Yet the market may need to consolidate a while longer, before moving up again, Parker says. "If we go through a healthy consolidation, and people are happy to invest, there is an opportunity to generate shareholder value."
