CQS Gives U.S. Stocks a Stamp of Approval With New Equities Fund

(Bloomberg) -- At a time when U.S. stocks trade near a record high, billionaire Michael Hintze’s $18 billion asset management firm CQS believes more returns can be reaped as clients seek out risk assets.

CQS, one of the largest credit hedge fund firms in Europe, is expanding its asset management arm with a $31 million fund focused on North American equities. Portfolio manager Raphael Pitoun, who also manages the firm’s New City Global Equity fund, says he is betting on non-crowded quality companies that are able to prosper even during an economic downturn.

The firm is touting U.S. equities at a time when the S&P 500 surged to a record high after the optimism over a U.S.-China trade deal and better macro data fueled investor appetite for riskier assets. While U.S. stock valuations are high, equity bulls like Goldman Sachs Private Wealth Management, believe that the main returns still come from an overweight in U.S. stocks.

“There’s definitely an attraction for U.S. stocks coming from clients,” said Pitoun in a phone interview. “When the downturn happens — it may be next year, it may be the year after — we think the businesses we invest in are going to provide a high level of downside protection because of the strong balance sheets.”

The past weeks have seen a rotation away from more expensive safe stocks into more volatile value and cyclical companies that are sensitive to the economy. Quality and strong balance-sheet shares have been a market favorite for most of the year until recently, amid concerns about the late stage of the cycle.

Due to the rotation “it’s not a bad moment to launch a fund of quality companies,” said Pitoun, adding that valuation is a major factor when picking stocks.

Still, some of the new fund’s picks aren’t exactly dirt cheap. The strategy includes Xylem Inc., a New York-based water company, which trades at 23 times forward earnings, and Rollins Inc., a pest control service provider based in Atlanta, which trades at 49 times estimated earnings.

Rally Doubters

After the S&P 500 has rallied 23% this year, some strategists are beginning doubt that the gains can continue at the same pace. JPMorgan Chase & Co. strategists led by Mislav Matejka recently took profit on a long-standing overweight in U.S. equities, saying that international stocks will outperform in the future. HSBC Bank Plc strategists led by Max Kettner say risk assets are ripe for a pull-back in coming weeks, saying macro data don’t justify recent outperformance.

CQS, the credit-focused investment firm best-known for hedge fund strategies, now manages more money in long-only funds and is growing at a time when the assets of many peers are shrinking. The CQS New City North American Equity Fund, which launched on Nov. 5, invests in about 25 companies with an average market capitalization of between $20 billion and $40 billion.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Monica Houston-Waesch

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