Interview with Mark Denham – Fund Manager at Carmignac Gestion

 How do you see the current economic landscape?

First quarter 2020 has been volatile. It started with good momentum, on the back of 2019, up until mid-February. It then weakened significantly on the back of Covid-19 shock and it has not recovered yet from a peak reached on Feb 19^th, albeit after a modest rally lately. The resulting slowdown of the economic landscape has affected all European sectors which then experienced significant volatility to the downside. Nevertheless, ultimately, we know economic activity and corporate profits will eventually recover – albeit the shape of the recovery is still somehow uncertain – with fears of a relapse of Covid-19 infection later in the year. One key issue is how fast will the recovery be in second half 2020 and into 2021, and what profits will European companies make in 2021. Nobody currently knows for sure, but investors in equities must think on a 3 year or longer horizon by which time probably most companies will have emerged from the crisis. 

What is your view on European equities and which sectors can perform best in the current market climate?

We maintain the bulk of our portfolios with a bias to quality secular growth companies, the ones which to some degree can grow under their own steam. These companies are less reliant on falling economic activity and importantly have higher profit margins than average so, if profitability falls due to shocks, they should still make money. These kinds of businesses include medical technology companies, software companies with a high degree of recurring revenues or consumer staples businesses. However, when investing in equities, investors should be thinking on a long-term investment horizon. Therefore, we use the current period of stock price weakness to add new names if we feel their stock prices have fallen too far. This has been the case for example in the semiconductor space or within the travel related environment. 

What is Carmignac Portfolio Grande Europe's investment approach?

Our approach starts by filtering an investment universe of 1600 of the largest companies in Europe. We do this by measuring a range of factors all related to the profitability and reinvestment rates of these companies, focusing on the 500 or so which score well on our recipe of these metrics. The purpose of this is to narrow down to the companies which can demonstrate self-sustaining growth. Then we apply our SRI exclusions and screens in order to reduce it at least another 20% to about 400 acceptable names. Finally, among these names we conduct fundamental research including our own forecasting, modelling, and valuation to select only the best 35-40 holdings which will end up being part of our high conviction portfolio.

What AUM do you manage in total?

As of 24th of April 2020 in European equities ca €400mn, and other International equity funds ca€70mn. 

Which parameter do you value most when selecting companies?

The vast majority of our holdings exhibit the key characteristic of secular growth which we define as having high sustainable profitability combined with internal reinvestment of profits in order to grow the business for the future, with less dependence on external conditions.

How many companies you contact and visit each year, on average?

We contact a lot of companies during a year, either through conference calls, meetings in our offices, conferences or visiting them. There is no typical number but more than 100 contacts of this nature a year would not be unusual.

Carmignac Portfolio Grande Europe is committed to ESG. What particular criteria do you apply when selecting stocks?

We consider many environmental, social and governance (ESG) criteria when assessing the potential return and risk from a given stock. However, in this fund, we go one step further and have socially responsible investing (SRI) goals, whereby we exclude several sectors on ethical or environmental grounds (e.g. fossil fuels, weapons, etc) as well as emphasizing companies that score positively on our socially responsible screens which combine external rating assessments from MSCI but also our own proprietary screen-based around corporate contributions to the 17 United Nations Sustainable Development Goals (UN SDG’s)

How is Covid-19 impacting ESG?

Responsible investment funds have enjoyed not only positive fund flows, but also generally, have managed to conserve capital better than their respective ‘classic’ benchmarks over this year. 

Investors are attracted to Responsible funds due to their past defensiveness in downturns. Faced with recessionary conditions with over 80% of the global workforce in lockdown, companies that have shown strong management of their ESG-related risks have also shown a more robust EPS trajectory. Secondly these funds can have little involvement in the oil industry,  and are insulated from the extreme sell-off in oil prices, while the renewable energy stocks and other stocks sensitive to the green energy supply chain in the portfolios have been quite defensive with strong growth profiles. 

Last November you received an 'A' rating from Citywire. How did you feel about this recognition?

Yes and more recently we were also pleased to be upgraded to ‘AAA’ by Citywire in March. We like this recognition because as well as recognizing performance it is also an assessment of our risk-adjusted performance, and management of risk, or volatility, which is as important to us at Carmignac, as delivering strong performance is.