From his post in Dublin, Ireland, Martin Fahey, general manager and partner at I.G. International Management Ltd., keeps a watchful eye on all of Europe. As the lead manager of European equity funds for Investors Group Inc., the largest being the $1.2-billionInvestors European Growth, he employs both bottom-up and top-down techniques to help him sift through a continent of stocks.
"We are primarily stock pickers looking for undervalued situations," Fahey says. "But we try to do some top-down analysis as well, and formulate views about countries and sectors. It's a bit of a chicken and egg situation as to which comes first." For example, U.K. housing and retail stocks were recently beaten up across the board as investors anticipated that consumer spending would be pinched by a slowing economy. Fahey decided things were not as bad as stock prices indicated. He looked for the best opportunities created by the trend, buying Dixons Group PLC, the U.K.'s largest consumer electronics retailer, and George Wimpey PLC, a U.K. homebuilder.
While Fahey focuses mainly on large-capitalization stocks in European Growth (as well as in thecorporate-class andRSP versions of the fund), he seeks mid-cap and small cap stocks for other funds in his stable.Investors European Mid-Cap Growth and itscorporate-class version invest in mid-cap stocks with market capitalizations of US$85 million to US$2 billion.Investors International Small Cap Class, which he co-manages, seeks companies in the US$50 million to US$1.5 billion range.
Fahey was born in London, but his Irish family returned to Ireland when he was five. He earned a bachelor of commerce at University College Galway in 1987, followed a year later by a Master of Business Studies (Honours) degree.
He began his investment career in 1988 as an analyst with London-based life insurance company United Friendly Insurance PLC (now Royal London Mutual Insurance Society). Four years later he moved to Australian Mutual Provident Society. He was manager of European equities there for six months until he spotted an advertisement for a Dublin-based job with Investors Group, for which he successfully applied. He joined Investors in July 1993 as an assistant portfolio manager for global equities.
"We tend to be contrarian and search for opportunities others can't see," says Fahey, who has managed Investors European Growth since January 2000 and Investors European Mid-Cap Growth since its inception in May 2000. "We look for companies that have bombed out, and where sentiment is negative. We're also looking for reasons why the pessimism surrounding the stock will not be permanent."
Stocks are sold when the market consensus becomes rosy. Typically, Fahey determines a price that reflects the true worth of a company when doing his initial analysis, and re-evaluates when the stock rises 10% above this price. "We are flexible and will reassess the opportunity," he says. "There's no hard and fast rule. Selling is not an exact science."
A company is typically sold if it shows disappointing results, or if management doesn't follow through on plans, he says. Cyclical companies, in particular, don't grow steadily but instead have "their day in the sun," and it's important to be conscious of economic cycles that affect sales prospects, he says.
Fahey's turnover rate tends to be moderate. In the year ended June 30, it was 36% for Investors European Growth and 44% for European Mid-Cap Growth. "It takes time to find ideas, and for them to come to fruition," Fahey says. "A relatively low turnover is consistent with a value investment philosophy."
He limits the number of holdings and will typically hold 35 to 65 companies. "Too many stocks dilute the impact, and no one person can follow an excessive number of stocks," he says. "It's better to know 50 stocks well, than 100 not so well."
In evaluating a company he takes a hard look at price/earnings and price-to-book ratios, dividend yield, debt and cash flow. He also assesses liquidity and foreign exchange risk and scrutinizes the depth and experience of the management team. "You can't have one person who's 75 years of age running the whole show," Fahey says.
Although his biggest holdings don't usually amount to more than 4% or 5% of his portfolio, he doesn't like to give himself a limit other than the 10% legal maximum. "I don't want to constrain myself," says Fahey, who has guided both Investors European Growth and European Mid-Cap Growth to Morningstar five-star ratings. "The objective is to generate returns for unitholders, and when there are great opportunities I want to take advantage of them."
