June 7, 2004 — The ICAP Funds:European Select Equity Fund (ICEUX) invests overseas, but it judges stock prices by comparing them to an American equity market gauge, the Standard & Poor’s 500-stock index.
Lead portfolio manager Rob Lyon and Matt Pickering hunt for European companies whose shares they consider inexpensive relative to the S&P 500 and their industry peers. Pickering joined Lyon on the fund in 2000.
Overall, Pickering describes the fund’s holdings as “a stable group of large, blue chip, multinational companies,” that as a rule generate “average to above average” returns on equity and capital. The managers also favor businesses with strong cash flow and low debt. When everything else is in place, they scan for a catalyst, like a new product, that can spark growth.
The two stock pickers limit their portfolio to 20-25 stocks. Not many companies have the financial characteristics they prize, says Pickering, who adds that the narrow focus facilitates research and enables winners to make maximum contributions to the fund’s performance. “We’ve found that it allows us to deliver the best risk-adjusted returns for our clients,” he says.
The $57-million ICAP European Select Equity was one of the ten best performing European funds during the one and five years ended in April, and it’s expenses were among the lowest in the category.
The ICAP fund returned 38.8% and 2.7%, respectively, for the one and five-year periods, versus 35.7% and 1.9% by its peers. The fund sports a very low expense ratio of 0.8%, versus 1.93 for all 120 European funds.
Pickering cites Vivendi Univl SA ADS (V) as a typical investment for the fund. Paris-based Vivendi started life as a water company and has transformed itself into a media and telecommunications power.
Former chairman Jean-Marie Messier had made acquisitions that saddled Vivendi with debt. But his successor, Jean-Rene Fourtou, who came on board in 2002, has “done a good job” of selling off non-core operations and lowering liabilities, Pickering says.
In its first quarter report on May 27, Vivendi said it had net debt of about 7 billion euros ($8.5 billion) — down from 11.6 billion euros ($14 billion) two months ago thanks to the recent sale of its U.S. entertainment division to the NBC unit of Genl Electric (GE).
The fund bought Vivendi in February. At the time, the managers felt its assets were priced too low in comparison to its assets, especially since it was shedding debt, Pickering said.