MainFirst keeps prefering cyclical companies

What is your view on the relationship between bottom-up and top-down approaches, as markets become more international?

Olgerd Eichler

For our funds, we apply a bottom-up approach to identify potential outperformers regardless of any specific sector view. In a second step, we do a countercheck to further solidify our assessment by running a macro or top-down analysis. In a world of global free trade, there are so many factors which need to be taken into account before coming to any conclusion. The possibilities for events that will have global effects of a potential trade war or other crisis always need to be factored in.

Do you have a preference for certain sectors?

We have comprehensive understanding and a very good network when it comes to German and other European companies, in general. For instance, we possess profound expertise in industrials and financials.

Which valuation variables do you prefer?

We look at all the common valuation variables. We prefer companies with above average earnings growth and high profitability figures that put an emphasis on net profit and cash flow generation. We want to participate in the development of prosperous companies, meaning a company generating value for its shareholders.

Besides value, quality and momentum, do you see other dominant factors?

In general, these are the main classifications for investment styles. We see some other drivers in sentiment, especially when the sentiment among the market participants is overly optimistic or pessimistic. We like to have an outlier opinion, we are really active investors, actually, this is a necessary condition to achieve above average returns. In addition, we see quality as a very important aspect when investing into stocks. We assess quality on the basis of our in-depth analyses of companies.

How do you try to minimize the risk of your portfolio?

We are very selective with respect to adding new stocks to our fund. Only after a very restrictive and in-depth analysis new companies are added to the portfolio. We always do our utmost to avoid mistakes – it is one of the reasons that have allowed us to outperform the market. In addition, we apply very high standards and carefully track the development of the stocks and the companies we hold by setting up calls or meetings with the management and getting feedback from analysts, from the press, etc. We spend roughly 70% or more of our time tracking them. The rest of our time we spend looking for new potential holdings.

Do you agree: spreading/diversifying a portfolio becomes more difficult as markets become more international?

It is difficult to have an independent economy, which is not affected – whether positively or negatively –by the world economy. Rather, both market movements and portfolios become more correlated through the interdependencies of global trade. We try to counterbalance this fact through idiosyncratic investments in companies we know very well and which are often less prone to global issues.

Do you have different/separate valuation methods for micro-, small-, mid- and large-cap stocks?

Our quality standards and valuation methods do not differ depending on size or market cap. However, we are aware of the lower liquidity in small to mid-cap companies.

What are your tips for 2019?

We still see a lot of potential in cyclicals. Many sectors in this field trade at very attractive multiples, already incorporating a larger potential for a recession, which we do not think will take place.

How do you try to avoid value traps?

As mentioned above, we are very cautious and selective when it comes to adding new stocks to our portfolio as well as our long-term holdings. In general, we do not own stocks of companies whose management we have not met before buying in. We would rather miss out on a temporary good performance of a risky stock if we are not sure about it. On the other hand, we are very close to the companies that we are invested in and like to see ourselves as long-term shareholders and a bit like sparring partners. One of the reasons for conducting in-depth analyses is to avoid value traps, which only look cheap at first sight, because more often than not, there is a reason why this is the case.

How many names do you normally hold in your portfolio?

Usually we hold approximately 50 titles in the MainFirst Top European Ideas Fund – however, the fund has a very concentrated portfolio with the top 20 positions often making up more than three quarters.

How do you cover (hedge?) valuation risks?

In our fund, we are long-only equity investors. However, MainFirst also offers other products that apply a hedging strategy. In the MainFirst Top European Ideas Fund, we aim to be fully invested as we see ourselves as representing the equity part of an investor’s overall portfolio of assets. Hence, we do not pretend to know better than our investors whether to hold cash or not, we only try to be good at finding stellar outperformers.

Do you agree: benchmark thinking has become more important than absolute return?

We think with the surge of ETF investing, more and more people think alpha generation is impossible. Therefore, they are satisfied with benchmark returns. The fact that many normal fund managers do not want to perform too differently from their benchmarks - and potentially get attacked when they have actively taken decisions -aggravates this development further.