“When the world is growing at 5% a year all companies make money, but when global growth is just 1% it is just the most efficient companies that make money and achieve good return on capital employed.”
Top stockpicker targets efficient companies to ride out recession
AAA-rated mid cap manager Pascal Riegis from Oddo Asset Management says that even in a recessionary environment, stockpickers can make money from Europe’s most efficient companies.
‘When the world is growing at 5% a year all companies make money, but when global growth is just 1% it is just the most efficient companies that make money and achieve good return on capital employed. We are concentrating on those ones,’ he says.
Riegis runs a number of small and mid cap funds, with assets of €700 million, alongside co-managers Grégory Deschamps and Sébastien Maillard, including the Oddo Avenir and Oddo Avenir Europe funds. He was recently placed 28th in the Citywire Top 100 list for his strong three year risk adjusted performance.
The Top 100 list was topped by another French small and mid cap trio, Moneta Asset Management, and the Oddo trio share a similar approach, including a focus on close contact with company management. Indeed, Riegis and Moneta founder Romain Burnand actually worked together earlier in their careers.
Riegis and his co-managers buy companies with an average market cap of around €2 billion. They put a great degree of emphasis on companies that can produce healthy return on capital employed (ROCE) over an entire economic cycle. ‘We tend to always underweight some sectors and overweight some others,’ Riegis says. ‘All in all we have the same balance between cyclical and non cyclical stocks as our universe, so we don’t take any macro bets in out portfolio.’
This focus on ROCE meant that he was able to avoid some of the worst performers in the last couple of years.
‘We are always structurally underweight companies which have a poor ROCE over the entire cycle, for example basic materials and financials. We did not avoid financials just because we are clever, we were also avoiding them three or four years ago, raw materials too. We always tend to overweight industrials and technology stocks, because we can find more companies in those sectors that have good ROCE over an entire cycle and businesses that can grow internationally and are stable.’
Riegis currently thinks valuations look ‘attractive’ and among his top stockpicks currently are product lifecycle management software firm Dassault Systems and bioMérieux, which is involved in vitro infectious disease diagnostics. His portfolios typically contain around 35-40 stocks and the top ten holdings account for more than 40% of the funds.
Over five years, Riegis, who says his goal is ‘slight outperformance every year,’ is ranked 6/66 in the European small and mid cap sector. Over the same period in the French small and mid cap sector, he is ranked 2/35, just below former colleague and leading fund manager Burnand.