26 JUL, 2023
By Stefano Battel
The Luxembourg-based DGC Stock Selection B EUR aims to achieve capital growth in excess of the MSCI World Index in EUR. After deducting fees over a period of three to five years, it invests primarily in equities, equity securities and equity-like transferable securities.
To achieve its objective, the fund may invest up to 10% of its net assets in UCITS and other UCIs. According to the prospectus, the fund will maintain a diversified portfolio that promotes exposure to global equity markets in Europe, North America, Asia and emerging markets.
NS Partners Group (Notz Stucki), founded in Geneva in 1964 by Beat Notz and Christian Stucki, is one of Europe's leading independent asset management firms specializing in alternative strategies. The company has offices around the world and has a total of more than 100 employees and EUR 10 billion in assets under management. In addition, it has a structure of 28 professionals active in wealth and asset management.
The DGC Stock Selection B EUR fund, being an active fund, selects sectors and companies internationally, showing a strong concentration relative to its benchmark, and is therefore aimed at investors seeking to enhance their portfolio with a high conviction strategy in international markets. By way of explanation, at the end of May, the fund had invested in 43 instruments, of which the top 10 accounted for 35% of the total asset allocation, compared to 2,935 for its benchmark.
The strategy charges fees in line with its peers, with the percentage in the middle quintile.
The manager of this fund is Pierre Mouton. Mouton has more than 20 years of portfolio management experience with an average Morningstar rating of 3.7. This indicates an above average ability to create risk-adjusted returns. He joined NS Partners in 2003 managing the DGC Stock Selection fund. He invests in large-cap stocks in most developed markets. He invests in high quality companies, irrespective of the sector in which they operate.
As a conviction fund, Pierre Mouton has maximum freedom in its asset allocation choices as it is not constrained by the benchmark. This means that he can include or exclude companies in the benchmark and overweight or underweight relevant sectors as long as they are in line with the fund's investment philosophy and process.
At the end of June 2023, this strategy had more than EUR 380 million in assets under management, of which approximately EUR 108 million belonged to the class B.
Looking at the fund in question, the track record provided by the manager is more "mixed". It has outperformed the category average (Fund Global Large-Cap Blend Equity), but underperformed the benchmark over the past nine years.
However, the table shows that the fund has outperformed, starting in 2019, even in particularly difficult market phases such as 2020 and 2022. It also outperformed the category index by approximately 28% over the same period. The risk-adjusted performance only confirms this. A Sharpe ratio of 0.71 compared to 0.45 for the category and 0.58 for the benchmark.
However, this performance was achieved at the cost of slightly higher volatility for investors. Thus, the strategy took on more risk than the benchmark while managing to reward it. This is confirmed by the broadly positive alpha. Meaning that many of the tactical options in the fund were able to add value relative to the broader market. As noted above, this could be attributed to the solid, conviction-based process of the fund team. Which maintains positions and confidence in particular companies regardless of short term volatility.
The market beta is slightly above 1. This indicates that this is a fund with slightly higher systemic risk than its benchmark.
One of the best demonstrations of the fund's active management is its sector allocation compared not only to its benchmark but also to its category, the Global Large-Cap Blend Equity Fund.
Sectoral exposure of the fund
We can observe differences derived from the investment philosophy of the management team with bets in:
This leads us to believe that the addition of this strategy brings diversification to a portfolio containing a fund or ETF more in line with its category.
It may not appeal to investors concerned about sustainability. In fact, according to Morningstar's Sustainability Rating, the fund has only two globes. That is, it holds stocks with relatively high ESG risk compared to its peers in the Global Large-Cap Equity segment.
ESG risk measures the extent to which environmental, social and governance issues could influence valuations of the underlying securities. The latter differs from impact, which refers to the promotion of environmental and social outcomes that benefit society. The fund's current holding in fossil fuels is 11.09%, exceeding the category average of 7.54%. Companies that derive revenues from thermal coal, oil and gas are considered to be involved in fossil fuels.
A more detailed analysis, still according to Morningstar, shows that the fund has a Carbon Risk Score of 7.85. It indicates that the portfolio companies face low-carbon risks in the transition to a low-carbon economy. This is achieved by the fact that around 11.90% of the portfolio companies are engaged in solutions to reduce carbon emissions. Including products and services related to renewable energy, energy efficiency, green buildings, and green transport.
The fund has a modest level of exposure (7.38%) to companies with high or severe litigation. Highly or severely litigious companies are companies involved in incidents such as corruption, employee abuse, environmental incidents and corporate scandals that pose serious risks to the company.