Stevenson is recalling a watershed moment in his life when he visited East Germany in 1981, before the Berlin Wall came down eight years later.
“I spent a year at university in Germany, and I went to Berlin which in those days was still segregated.
That made a remarkable impact on me.
You could go into East Germany for 12 hours and look around – a very stark difference – and it’s not that long ago.”
Since then the speed of integration and change in Europe has been “just phenomenal”, he says, and when he entered the City, he felt this part of the world was a logical focus for his investment career.
This has mostly been spent with Henderson Global Investors specialising in European funds since 1986 and currently as director of European equities, managing its Horizon Pan European Equity Fund, which has grown to €3.4bn (£2.6bn) in assets since launch in 2001.
The remit covers the UK as well as continental Europe.
“I would never do anything else. The UK is still part of Europe regardless of what Mr Farage might want, and frankly always will be, if only because of geography. You can’t change that bit about it.
“Europe’s what fascinates me. It’s still a very interesting area and very challenging as well.”
Keeping the peace
During one of those inevitable conversations about the cost of the UK being involved in Europe, Stevenson says someone he met recently made a hugely important point.
“I’m not for one minute saying that Europe is efficiently run, don’t get me wrong, I’m sure there are plenty of cost savings that Europe could do. But he said that if we ever priced up the value of peace that we’ve had in Europe, in terms of the fact that we’ve not got these huge armies facing each other and everything else, a lot of the money now is going to make sure that Europe stays a peaceful and welcoming area for the rest of the world. It’s an interesting perspective to look at it from the other way.”
He also cites “the brilliance” of some of the companies that are out there in Europe.
“Sometimes they are expensively valued, sometimes they’re cheaply valued, sometimes they do brilliantly and they are up 20% a year, and sometimes they have a dreadful year and they’re down 10%, but actually there are still a terrific number of great businesses in Europe.”
Henderson has built a strong range of European funds over the years, bolstered by the purchase of New Star in 2009, which brought in Richard Pease, Simon Roe and James Miller.
And although Pease and Miller are leaving Henderson, Roe is still in the team.
There is also Nick Sheridan, who works very closely with Stevenson on the quantitative analysis side.
The further acquisition of Gartmore in 2011, which brought in John Bennett, Leopold Arminjon, Eleanor Cameron, and Asim Rahman, was “in many ways the making of the European team”, he says.
“It has really strengthened the European team and we’ve added to the team since then as well, acquiring three top analysts. The European team at Henderson is stronger than it has been at any time in my 28 years with the company, immensely strong, which is exactly what you need given the diversity of the European market.”
Something for everyone
So what happens when a client walks in the building and wants to put some money in Europe?
“We’re not all, sort of, saying, ‘Ah he’s mine!’. The whole point about it is that we want that client to walk out with one of our products, preferably all of them if they want. If they need some small-cap exposure with Ollie Beckett and Rory, Leopold’s long-short idea or John’s fund, it doesn’t matter.”
Specifically, the Henderson Horizon Pan European Fund has a clear growth bias mandate, investing in what Stevenson describes as good quality, consistent, reliable companies that can increase shareholder returns.
So, with earnings per share growth of 10% estimated for 2015, Stevenson would like his fund to be powering ahead at 11% or 12%.
“There will always be a greater element of growth within my portfolio but you have to put that in the context of the fact that Europe is a low-growth area and we’re in a low growth world.”
Talking politics
Geographically, he is underweight in the UK relative to other areas because although the UK economy is clearly doing better than the rest of Europe, the negative is the prospect of a “pretty uncertain election coming up. Politics in the UK look pretty messy”.
Politics in Europe is also problematic: “It’s who’s the least ugly. Which applies to an awful lot of investment these days – the least ugly competition rather than the most attractive.”
From a sector point of view, the fund has a little bit of an overweight position in industrials, many of which he would classify as business sector stocks such as temporary employment agency Adecco, the UK outsourcing company Capita or Sodexo, the catering company.
He is underweight in cyclicals, although he has one mining name, Rio, in the portfolio, no engineering stocks and very little exposure to oil throughout most of last year (and to date).
Other underweights to varying degrees are in the financials, consumer staples and utilities sectors.
The portfolio can hold a maximum of 60 mid- to large-cap stocks of more than €2bn in market capitalisation.
Life through a lens
One of the stocks he purchased over the past six months that he picks out is Essilor, which makes and distributes optical lenses.
“It’s a very interesting company that I know extremely well. I’ve been invested in it for many years but we sold it around about a year ago because I was concerned about the low rate of growth the company was seeing after a couple of acquisitions.”
He still believed the underlying growth in the company was intact, and it was just a question of when the market would recognise the growth beginning to come back.
In July last year he bought the stock again and has since built the position further.
With a multiple of over 20x earnings, it is one of the most expensive in the portfolio.
On the currency front, he says Essilor is a beneficiary of the higher dollar and lower euro, as well as benefitting from the emerging markets, including not only China but India as well.
“In developing markets, people are fed up with walking into a lamp post. They want better glasses. The research and development in that company is quite interesting, in terms of being able to help people fit glasses and not just the opticians. They get the prescription right and make the glasses fit, which is not as straightforward as you think.”
Underlying growth is around about 5% in sales, but he says because it’s a very soundly financed company with a strong balance sheet, it can make those bolt-on acquisitions which has added to the overall prospects, notching up to around 8% sales growth.
Whereas he says a lot of his colleagues may look at Essilor and regard it as expensive, he is prepared to live with a higher rating if the business has a good long-term, consistent profile.
Patience is a virtue
That is one reason why he always tells investors that he prefers them to be “patient with what we do”.
“I really don’t like short-term investors investing in my fund. There will be periods where the fund will underperform and there will be periods where it outperforms. If you look at last year, we had a pretty torrid first half of last year and a spectacular second half. You have to have patience in the same way that we’re patient with the companies we’re invested in.”
As for the euro weakness against the dollar, he sees it as “fantastically healthy” and points out that the euro has become much overvalued in the past few years, he suggests.
One way of looking at the economic scenario is that Europe’s recovery is still ahead of it.
“Be that as it may, I still maintain that Europe will have a low growth rate anyway for years to come. If we can eke out a 7-10% return for the next five years from investing in European equities that would be a respectable return.”
