New Star European Growth - Fund Update

By Alexander Davies | 13 May, 2008 

We spoke to Richard Pease, the fund manager, for a fund update. Performance has markedly improved recently and our analysis suggests the manager’s stock selection has helped.

2007 was a tough year for the fund relative to the sector. Yet Richard Pease stuck with his philosophy of buying quality, well run businesses that generate high levels of cash. The market is now starting to reward this philosophy.

He continues to invest predominantly in medium-sized companies. This area of the market suffered more than most in the recent volatility and this was felt in the fund. He is not looking for racier companies, one stock he owns is Schindler – the lift manufacturer. This is essentially a ‘boring’ business but in these markets these companies can reward. They have a lot of repeat business and 75% of their revenue comes from servicing existing lifts which means cash coming into the business is steady and recurring. 

The manager’s outlook for banks is cautious. He believes sentiment towards this sector will continue to be poor in the short term. Despite seeing what he believes to be high quality firms in the sector this headwind makes him reluctant to invest at the moment. For the time being he is happy to monitor the sector and see how things develop.

Richard Pease has noticed that there seems to be some discrepancy between what is reported in the news and what company management says. Many directors he has met have been taking the opportunity to buy their company shares whilst the price is weak believing their shares to be undervalued. In contrast the news seems to only report doom and gloom about the economy, and a potential looming recession, but companies are currently not feeling this pressure. Of course this may change in the future but currently companies are generally more optimistic than the market may suggest.

Following the spate of under performance last year we have been monitoring this fund closely. However, recent strong performance has highlighted that a manager of Richard Pease’s pedigree can have the ability to bounce back strongly, even when times are tough. Even the best managers suffer periods of underperformance from time to time and a good fund manager should not be written off overnight. We continue to believe that New Star European Growth is one of the best funds investing in this sector and this fund fully deserves its place in the Wealth 150, a list of our favourite funds for new investment.