HEAD-TO-HEAD: Eastspring versus T Rowe Price

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Investment approach

The primary aim of John Olsen and his Eastspring team of five managers and analysts is to identify companies with competitive advantages that lead to pricing power and superior returns, according to Meakin.

The pan-European universe of stocks is first filtered by market capitalisation, liquidity, and certain ESG criteria, and then the team “drill down in detail to understand the true nature of the sustainability of a business model — for example, examining the economic value added over time and the dynamics of the industry in which a firm operates — with a view to holding a stock for the long term once it is bought,” he said.

Company visits are an important part of the process, when firm culture, governance, management incentives, ESG policies, and business ethics are assessed.

“Over time, Olsen has built a watchlist of around 300 companies globally (120 in Europe) that meet his investment criteria should their valuations prove attractive,” said Meakin.

The team assigns probabilities to various scenarios to calculate a probability-weighted valuation for a stock, and Olsen waits for short-term disruptions to provide attractive valuation entry points.

The portfolio is typically concentrated in 25-35 stocks. Potential investments are broadly split into “stable growth” (companies with a large competitive advantage) and “opportunities” (narrower competitive advantage) stocks.

“As well as diversifying in this way, Olsen aims to invest in a range of diverse business models and different types of competitive advantage when constructing the portfolio,” said Meakin.

“This should result in a balanced portfolio with quality characteristics, but at reasonable valuations,” he said.

The portfolio is unconstrained, and given the focused approach, it can have large active sector and country weightings relative to the index and peers. It has overweight exposure to industrials and consumer discretionary, and is underweight financials and utilities, according to the most recent fund factsheet. Denmark was the largest country overweight, and France was the biggest underweight.

Turning to the T Rowe Price European Equity Fund, manager Dean Tenerelli “pursues a sensible, repeatable approach,” said Meakin.

Tenerelli looks for companies with quality characteristics, including superior profitability across the market cycle, durable cash flow profiles, and strong balance sheets – and preferably companies in industries with high barriers to entry.

“Idea generation can come through several sources, such as analyst stock coverage, company meetings, and a simple initial quant screen that ensures he continually monitors the entire opportunity set,” said Meakin.

“Valuation discipline is a key part of the approach, and the manager uses zero-growth discounted cash flow valuations to seek out attractive companies,” he said.

The fund’s focus on quality combined with discipline on valuations leads to a portfolio that contains both value and growth stocks, according to Meakin.

The portfolio typically contains between 50 and 80 individual holdings, and although Tenerelli mainly buys large-cap stocks, he is happy to move down the market-cap ladder. Sector and country weightings are a product of the bottom-up stock-selection process, and the fund’s biggest country overweights are Spain, Italy and Sweden, and largest underweights are the UK and Germany, according to the latest factsheet. At the sector level, it is overweight healthcare, communication services and industrials, and underweight consumer staples and financials.

Source: FE Fundinfo, Morningstar. (Data in US dollars, 23 April 2020)

Fund characteristics

Country allocation:

Source: Morningstar, 31 March 2020

Sector allocation:

Source: Morningstar, 31 March 2020

Top 5 holdings:

Source: Fund factsheets, 31 March 2020

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