Is leading restructuring fund poised for a comeback?

By Philip Haddon | 08:01:00 | 02 March 2010

Performance clinic: With firms rebuilding and M&A tipped for a resurgence, is it time to back a struggling restructuring fund? Citywire speaks to manager Estelle Menard to assess her prospects.

Back in 2007, fund manager Estelle Menard produced some strong outperformance. In the graph below you will see that in the three years up to the end of 2007, her CAAM Actions Restructurations fund returned 74.5%, while the average European equity fund returned just 47%.

While Crédit Agricole Asset Management CAAM has taken on a new name – Amundi – for the new decade, Menard is also looking to make a fresh start in 2010 after two disappointing years.

GLOBAL FEB - CAAM graph 2

In the last two years Menard has failed to keep ahead of her peers and lost 32.6%, almost 6% more than her average peer and over 8% more than the FTSE Europe index.

This tough period coincided with the launch in October 2007 of a Luxembourg-domiciled version of the fund calledCAAM Funds Restructuring Equities, investors in which have yet to see the best of Menard’s talents – talents which previously earned her an AAA-rating from Citywire.

GLOBAL FEB - CAAM graph 1

But as companies and consumers emerge from the other side of the financial crisis, conditions could become more agreeable for Menard to return to form.

It was her failure to keep up with her peers during the rallies of 2009 that particularly grates with Menard. ‘In 2009 I was very cautious in my investments,’ she says. ‘It was a year of restructuring, but the stories began at first on the bad quality stocks and financials.

‘I was cautious and I didn’t want to invest in financials at the beginning of the year as most of the restructuring stories in the financial sector were low quality stories. Also I kept in some good quality stocks in the consumer staples sector and these performed badly.’

Her funds focus on two different types of restructuring. Firstly, there is the economic restructuring theme that focuses on internal changes such as cost cutting, deleveraging and changes in management. The second is financial restructuring, which targets external changes such as mergers and acquisitions, management buyouts and leveraged buyouts.

Currently 60% of Menard’s portfolio is focused on the economic restructuring theme, with 40% focused on the financial theme. In the former, she believes internal company changes will be rewarded by the market this year.

‘I still believe in economic restructuring for 2010… I believe European companies still need to reduce their level of debt, so we will see more debt reducing, deleveraging and cost-cutting programmes. That means more economic restructuring programmes,’ she says.

In addition, she expects an increasing number of companies to sell off parts of their business, as well as others becoming predatory in the M&A space, providing her with a wealth of opportunities later in the year.

‘Following their cost-cutting plans, to maintain their level of margins in a depressed environment, companies will need to make some asset disposals in 2010 and sell their lowest margin activities,’ she says.

Currently the top holdings in Menard’s €1 billion strategy are miner Anglo American, banking giant HSBC, chemical firm Bayer, healthcare group Sanofi Aventis and Banco Santander.

She sees most of these as restructuring stories but a third of the names in Menard’s top ten at the moment are M&A plays, a tactic that is likely to increase later in the year. ‘Some sectors are very fragmented and need to consolidate,’ she says.

‘The financial sectors are interesting, consumer staples, telecommunication and materials. We should face consolidation in these sectors, and I particularly think the materials sector will be interesting for this theme.’

She also thinks 2010 will see the return of two sleeping giants of the M&A world: private equity and sovereign wealth funds.

‘It will not be in the months to come, but I think they will come back when they think the crisis is really over. Private equity won’t have the same leverage we saw in 2006 and 2007, but they will come back and take part in consolidation activity in late 2010 and 2011.’

Menard prefers to invest in the targets rather than the predators in deals, and the challenge is getting there early enough.

‘If we want to catch the big part of a stock’s improvement, we need to anticipate who will be the targets of tomorrow and find good entry points. I need to invest before there is any speculation, but I cannot be invested in stocks with a bad quality profile just because I think speculation will drive the stock price.’

To gauge the likelihood of her success in 2010, it is perhaps useful to see how she performed the last time M&A activity was booming, in 2006 and 2007. The fact she returned 35.7% in the two-year period while the index rose 25% is a good sign, but there is no guarantee it will be repeated.

Verdict:

In my opinion, to invest in the CAAM Restructuring fund is to put a great deal of faith in Menard’s stockpicking skills and, to an even greater extent in the restructuring theme. After all, many fund managers have restructuring as one of many themes in their portfolios.

The European equity sector is full of great stockpickers, and it may be better to find one who is not constrained by the narrow confines of a predetermined theme.

Philip Haddon holds the Invesment Management Certificate (IMC).

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