One of Europe's Best Investors Doesn't Think About Trump

(Bloomberg) -- One of this year’s best-performing European equity fund managers says trying to predict geopolitics is a waste of time for an investor.

“We don’t think about macroeconomics, we don’t think about interest rates, we don’t think about Trump, we don’t think about politics or Brexit,” said Kevin Murphy, who helps run the $1.5 billion Schroder Income Maximiser Fund, which has beaten 98 percent of peers in 2018 by focusing on U.K. value shares. “You’re much better off not trying to predict unpredictable events and focus on company fundamentals.”

Geopolitics along with concerns about rising U.S. interest rates have pummeled European stocks in 2018, with the Stoxx Europe 600 Index poised for its worst year since 2011. Just one strategist surveyed by Bloomberg in January had forecast the European market’s 2018 decline, made worse by Italian and U.K. political melodramas.

It’s all about careful stock-picking, with a focus on valuation, profit and balance sheet risks, Murphy said in a phone interview. The fund’s team selects U.K. companies that have already priced in negative news, so when the market encounters a downturn like the one seen in October and November, such stocks tend to outperform, according to Schroders.

Schroder Income Maximiser Fund has returned 4.7 percent this year and 11 percent over the past three years. In contrast, the FTSE 100 Index is down 8.2 percent in 2018 and the MSCI UK Value Index has dropped 9.8 percent. The fund’s top holdings as of Oct. 31 included Pearson Plc, BP Plc, GlaxoSmithKline Plc and HSBC Holdings Plc.

As the March deadline for the U.K.’s exit from the European Union looms, strategists are split on whether the nation’s stocks are cheap enough to outperform in an environment of intense political uncertainty. Sanford C. Bernstein calls the market “uninvestable,” while Citigroup Inc. says investors have already offloaded British stocks aggressively.

“There will be opportunities thrown up by Brexit, there will be new things to buy and we’ll need to be nimble in the marketplace to take advantage of the opportunities, but we’re not going to build a portfolio designed around hard, soft or no-Brexit,” said Murphy.

The FTSE 100 Index was little changed on Tuesday as an adviser to the European Union’s top court said that the U.K. should be allowed to reverse its Article 50 notice, which triggered the Brexit process.

Don’t Panic

Murphy is confident that value shares will beat growth stocks over the next three to five years. Global value equities have outperformed growth shares for the past three months, triggering speculation that investors are rotating into lower valuation stocks as they prepare for an economic slowdown and end to the bull market. After the dot-com bubble peaked in 2000, value beat growth in the U.S. for almost seven straight years.

Pearson, the fund’s top holding, surged 7.2 percent last month while the FTSE 100 Index fell 2.1 percent. Glaxo jumped 7.3 percent, whereas BP tumbled 8.3 percent as oil slumped.

“We spend our entire day with our heads in reporting accounts, looking at the company financials, and trying to find new cheap things to buy,” said Murphy. “And we don’t react to the markets and we aren’t emotional, and we don’t panic and we don’t get greedy, we continue look at all the opportunities we can find.”

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, John Viljoen, Jon Menon

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