Large cap quality stocks are now a crowded trade. Valuations are now at risk according to Euro Stars A-rated manager Ken McAtamney.
‘This idea of "quality" is in favour, or in vogue, if you will, because the notion is quality is coincident with solvency and balance sheet strength,’ he said.
‘The more defensive areas of the economy become more attractive in that instance and leads to higher valuations on some companies. We are paying a lot of attention to valuation risk’
McAtamney said part of the issue comes from the subjective nature of the term ‘quality’, which invariably means sustainable balance sheets and solvency.
‘A lot of investors are measuring quality by whether the company is going to become insolvent in a downturn and we think of it as, regardless of the economic environment, whether a company can continue to make strong returns on investors’ money.’
‘We tend to see a bigger opportunity set than others. We want to think more broadly than just the crowded trades that surround the idea of ‘quality’.’
Without pinpointing a firm specifically, McAtamney said a number of ‘defensive staples’ in Europe had proven particularly popular.
Small caps and EMs
The core of McAtamney and Grieg’s $145 million fund is in the financials sector (19.7%) and consumer discretionary (18.3%) names. This is with a slight bias towards mid and large cap names.
However, McAtamney said part of the clustering around so-called quality names means there could be potential in currently unloved parts of the market – namely, small caps and emerging markets.
‘We are probably more focused on small cap stocks at present; large cap stocks have been a very good place to be because they are high quality but because of this they have are perceived to be more defensive. This is where we have seen some valuation risk.’
‘Some small cap companies with a potential for some cyclical growth could be interesting. We have also been underweight or neutral to emerging markets of late but I think there could be opportunities there, particularly in emerging Asia.’
McAtamney said the firm had chosen to rebrand its Global Growth fund as the Global Leaders fund in order to make it reflect its house view of searching out leading companies and not due to a change of approach with regards to growth.
The William Blair SICAV Global Leaders fund has returned 57.88% over the past three years. This compares to its Citywire benchmark, the MSCI World TR USD, 43.41%.