Morningstar Magazine - August/September 2018 - 28

Dispatches

Amid Volatility, BottomUp Stock-Pickers
Stick to Their Knitting
Italy's political crisis created a bout of volatility
in European stock markets and marked yet
another test of the stability of the European Union.
The MSCI Italy Index was down 8.5% in euro
terms in May. However, the MSCI Europe-despite
being dragged down by many of its Italian
constituents-still eked out a small 0.1% return
over the month, highlighting the benefits
of diversification. The top detractors in the index
over the month were Italian names UniCredit
UCG:IT, Mediobanca MB:IT, Intesa Sanpaolo ISNPY,
and Telecom Italia TI, which suffered significant
drawdowns, to name a few. Those same
names had topped performance tables in 2017
with double-digit returns.
Italian stocks represent a small fraction of the
regional indexes, so higher portfolio exposures
reflect managers' active bets. Fidecum
Contrarian Value Euroland is the active fund with
the highest exposure to Italian stocks among
our rated funds in the cross-border universe.
(It carries a Morningstar Analyst Rating of Bronze.)
The fund's Italy exposure stands at around
18%, which is significantly higher than the MSCI
EMU Index's 5.8% stake. This is an outcrop
of the fund's long-term-oriented, bottom-up,
contrarian strategy. The fund is not invested in the
worst-hit segments of the market (banks and
insurance firms), whereas it does have significant
stakes in Eni ENI and Telecom Italia.
Indeed, the Italian-equity exposure of Morningstar's
cross-border Medalists has varied depending
on their portfolio managers' remits and styles. For
BGF Euro-Markets, the overweighting in Italy
has remained intact despite the recent turmoil.
The fund is Under Review due to the departure of
comanager Alice Gaskell, but manager
Andreas Zoellinger remains positive on the Italian
companies in his portfolio. Zoellinger, who
won the European Morningstar Manager of the
Year Award for European equities in 2018
with Gaskell, believes that although Italian political
instability affects market sentiment negatively

Morningstar August/September 2018

from a top-down perspective, longer-term bottomup prospects are still solid for the companies
he owns.
Although these situations are tricky to navigate,
Zoellinger believes that volatility created
by political risk can offer opportunities from
a bottom-up perspective, as was the case
with news around Brexit in 2016, for example.
BGF Euro-Markets' investment process
enables Zoellinger to invest where he sees
opportunities. As of April 30, the fund's largest
country overweight was Italy, which comprised
14.7% of the portfolio, nearly twice that of
the MSCI EMU at the time. The direct Italian
exposure consisted of Atlantia ATL:IT, Buzzi Unicem
BZU:IT, Enel ENEL:IT, FinecoBank FBK:IT,
and Intesa Sanpaolo. Enel is the fund's largest
active position with an overweighting of
3.6%, while FinecoBank is also among the largest
overweightings with a 2.8% active weight.
Telecommunication services provider Iliad ILD:FR
is the third-largest active weight. It is a French
company, but Zoellinger's investment case
centers around the company's bets on entering
the Italian market.
Although banks are key for Italy's stock market
and have a prominent weight in the MSCI
EMU Index, the fund was underweight in the
banking sector. Zoellinger argues that when rates
are likely to go up slowly, the net interest
income for banks is also expected to increase
gradually, especially when loan growth in
the eurozone remains sluggish. The philosophy
and process applied by Zoellinger typically
leads him to pick high-quality firms with stable
cash flows, financial discipline, and quality
management. These attributes have contributed
to a solid performance thus far during this
turbulent period.
Another European equity fund with prominent
exposure to Italy is Bronze-rated Allianz
Euroland Equity Growth, with an 8.4% stake that
is an overweight relative to its index and
peers. The managers, Andreas Hildebrand and
Marcus Morris-Eyton, have thus far stood
by the allocation to Italian stocks. This does
not surprise us given that the strategy
is benchmark-agnostic and does not actively

allocate to countries (or sectors). The managers
follow a pure bottom-up approach to
selecting stocks, focusing on high-quality firms
with sustainable profit and cash flow
growth that can outperform independently
of the market environment.
The fund's current positioning includes a 2.5%
position in Banca Generali BGN:IT. This stock has
fallen on recent political news; however,
the manager does not intend to change this
position. He thinks that the firm remains
well positioned in its largely local market due to its
high-quality network of financial advisors and
focus on the high-end market, where wealth and
investing attitude is less vulnerable during
downturns. (The assets of high-net-worth clients
represent around 75% of the total.) He believes
that Banca Generali is undervalued, with the stock
trading at 10 times 2019 earnings, despite
delivering double-digit revenue growth in 2017.
Apart from Banca Generali, the fund has smaller
holdings in several other Italian stocks, adding up
to around 6% of the portfolio. While Banca
Generali lost 23.1% of its value for the year to date
through May, the other picks were flat or up.
Muna Abu-Habsa is director, ratings, with Morningstar
Manager Research, EMEA & Asia.
Natalia Wolfstetter is director of fund analysis, Germany,
with Morningstar Manager Research.

Australasia Property
Outlook: Few
Current Values, but
Catalysts Ahead
AUSTRALIA + NEW ZEALAND

Australia

Among our Australian and New Zealand property
coverage, only retirement village operator
and developer Aveo Group AOG:AU screens as
attractively valued as of the end of June,
with a 4-star rating. We see numerous attractions

Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018