CAAM’s Estelle Menard may have scaled down her exposure to the M&A theme for now, but the AA-rated CAAM Restructuring Equities manager believes M&A activity could pick up by the beginning of next year, led by the beleaguered financial sector.
Menard has been consistently rated by Citywire over the past 24 months and manages the CAAM Actions Restructurations fund, which is only registered for sale in France, alongside the Luxembourg-domiciled CAAM Funds Restructuring Equities fund, which is available across Europe. The AA-rated manager, who focuses on companies with financial restructuring or economic restructuring potential, admits that performance has been ‘tough’ over the past three months, but has an optimistic outlook for the rest of the year.
‘I am still convinced the portfolio can do better this year. I think tough years like 2008 can have interesting points to invest,’ she says.
In fact, over the 12-month period to the end of June, Menard has posted a loss of 26.6% compared to a 23.4% loss by the FTSE Europe TR index. This compares with a five-year outperformance by the French-registered Restructurations fund of 72.87% compared to a 66.31% by the MSCI Europe TR index.
The Paris-based manager, who has a bottom-up stockpicking approach, puts recent underperformance down to an overexposure to the M&A theme and to banking stocks. As a result she has reduced her funds’ 75% allocation towards companies with M&A profiles since the beginning of the year to 50%. Meanwhile, she has increased exposure towards companies with economic restructuring potential from 25% to 50%. She believes this shift in focus is more appropriate in the current economic climate.
‘We need to be invested in these kinds of stocks right now in order to perform. They show margin resilience or margin recovery due to the launch of an economic restructuring programme,’ she says.
Despite reducing her exposure to the M&A theme, the AA-rated manager believes a pick-up in activity could be in store by the end of the year.
‘Why am I still 50% invested? Although the M&A thematic has been postponed, I still think it will recover by the end of the year, perhaps the beginning of 2009. We need to be present in good quality stocks with an M&A profile,’ she says.
In fact Menard believes we are close to the bottom of the market, which will be reached in a few months. Historically, she says, at around this point in the cycle there is an increase in economic restructuring stories, as companies cut costs in order to recover margins. She also comments there could be parallels between today’s economic environment and that of 2002-2003, pointing out that the next stage in the cycle five years ago was an increase in M&A, as a result of companies having more cash that they were willing to use.
Moreover, she highlights banks as ‘one of the sectors that will drive the M&A thematic’ and therefore believes it is important to look for investments in the sector.
‘In order for consolidation in the banking sector to happen, there first needs to be a clear recapitalisation and a recovery in terms of the confidence of investors, but this won’t happen for months,’ she says.
However, she acknowledges that an overexposure to banking stocks has caused recent performance to suffer, and she has reduced exposure from around 33% in December to 23% as a result. For example, she reduced her position in Société Générale and sold out of her position in Nordea in May in order to lock in profits. More recently in June she reduced her funds’ stake in Zurich Financial Services.
Nonetheless, Menard highlights the UK banking sector as an area of interest. ‘Some of the banks have been recapitalised but have very depressed share prices, which is interesting. I have never seen such valuations in the financial sector,’ she says.
The Paris-based manager also earmarks the materials sector as an area with potential for consolidation, particularly in the face of rising production costs.
‘There is a strong increase in raw materials prices, which helps companies with good fundamentals and presents a very healthy case to find cash and credit for financial operations. The increase in credit costs won’t be an issue,’ she says.
Likewise, Menard is expecting an increase in consolidation between emerging market and developed market telecoms companies and says it is something she is monitoring closely.
The AA-rated manager picks out British Gas and SBM Offshore, two top 10 holdings, as key contributors to performance over the past few months.