Although European markets staged a recovery last year on the back of firm words from the ECB on standing behind member states’ debt, a number of commentators and analysts warn that a break-up is still on the agenda thanks to the tensions created by running one monetary policy for many different economies. However, Bennett says that the danger of a sudden break-up has passed, and European Central Bank chief Mario Draghi will implement QE if all else fails.
“I think Draghi will fire the arrow of QE,” he said. “I think the moment for it to break is over. My single biggest worry about Europe is what is happening outside Europe: valuations on the S&P and what happens in the East.”
“Japan is trying to export deflation and the risk of deflation is very real, and if it happens you get out of equities.”
“It isn’t Europe that threatens the rest of the world, it’s the rest of the world that threatens Europe.”
Henderson European Focus, like many developed world funds to have had success in the past couple of years, is investing in technological themes.
The five crown-rated fund has a significant position in pharmaceuticals, which the manager says is entering a new age of product development.
The £151m fund’s three largest holdings are Novartis, Roche and Bayer. Healthcare makes up 28 per cent of AUM, its largest sector weighting.
Bennett admits this area of the market is particularly sensitive to US demand.
“In particular, US pharma prices are growing fast,” he said. “If that changes, we will have to revisit that particular position.”
Were drug prices to inflate at lower prices in the US, this would reduce the margins for European companies selling into that huge market.
Bennett was reaffirmed as an FE Alpha Manager in the latest rebalancing today. He has outperformed his peer group in each of the last seven years, with the exception of 2009, according to FE Analytics data.
The manager has made 81.43 per cent for his investors over the past five years compared with a peer group average of 69.04 per cent.
Performance of manager and peers over 5yrs
Source: FE Analytics
The Henderson European Focus portfolio has made 96.41 per cent over the past five years to the 78.38 per cent of Bennett's peer group average.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Bennett bought into pharmaceuticals when the sector was trading at around eight or nine times earnings. Even though valuations have expanded, the manager says it remains attractive on growth grounds.
The manager adds his voice to UK-focused FE Alpha Manager Mark Barnett, who recently told FE Trustnet he was sticking with the sector for similar reasons.
Novartis is on a price/earnings ratio [P/E] of 14.5 times while Roche is on 18.8 and Bayer is on an estimated forward P/E of 16.5 times.
“[When I bought them] even if they never invented a new drug, the cash flow was enough to buy the company in eight years,” he said. “It’s no longer a value play on a low teens multiple. You need some growth.”
“I think it will take a generation or two for this debt crisis to go away,” he said.
Bennett’s confidence in the sector comes from what he identifies as its “renaissance period” of new product development.
Science is cyclical, and the industry went through a fallow period, but pipelines are full of promising drugs. Earnings estimates for the companies are too low, he warns.
The manager also continues to play the theme of car automation, which he explained in an FE Trustnet article last year.
The European economy is improving, even in the peripheral areas, Bennett says, and investors have been slow to cotton on.
“It’s time to call off the dogs on Europe,” he said. “It’s easy to focus on how ridiculous things got.”
“The Irish took their medicine with a painful internal devaluation and you are seeing Irish and Spanish exports starting to pick up.”
The manager says that while he is sceptical of banks as businesses on the whole – they are often run by empire-building management teams who ride over shareholder returns – he is now overweight the sector for the first time in seven years.
He is also buying back into Greece, while he expects Spain and the UK to be the fastest growing economies in Europe this year.
His confidence comes from the interrelation of the economy with the richer parts of the world, which means it, and the euro, will not be allowed to fail.
“For seven years I haven’t been anywhere near Greece, now I own a Greek bank,” he said.
“The crack cocaine for Greece was provided by the German banking system. If you take out Greece you will get a domino effect in the German banking system and then the US banking system.”
In the open-ended space, Bennett also runs Henderson European Selected Opportunities and Henderson European Absolute Return, and the closed ended Henderson European Focus trust.
