The debate between value and growth is pointless, says Guy Lerminiaux, CIO of Degroof Petercam Asset Management. ‘This is not a productive debate. You have to look at it on a company-by-company basis. In every sector you find winners and losers.’
Lerminiaux, equities CIO of DPAM, has recorded an outperformance of 2% after costs since 1998 with his Euroland Equity Fund. ‘In 1998 we introduced a Euroland equity fund at then Petercam that was to provide an institutional response to our Belgium fund. Many institutional investors wanted a more European solution tailored to their needs’, he told Investment Officer in an interview marking his retirement. ‘Since the beginning, the portfolio construction has not really changed. That is something that the portfolio managers and I myself have always monitored. We have always focused on qualitative growth companies with a focus on midcaps that can grow into market leaders.’
‘We have always been stock-pickers with a certain top-down vision that also takes major themes into account. We also know our companies very well and have learned not to sell the winners too quickly so that they can ‘compound’. However, when the business case changed, such as an unfortunate capital increase or deteriorating balance sheet, we sold. You have to do that when something fundamentally changes. A portfolio sometimes loses alpha by holding on to poor performers for too long.’
Efficiency
According to Lerminiaux, there are still plenty of opportunities to create alpha. The secret is that you ‘have to fish in a pond that you know well’, he says. ‘That creates alpha. You also need to have sufficient conviction. For example, we achieved a large part of our additional return by investing a large proportion outside the benchmark. Our active share, the part of the portfolio that we invest outside the benchmark, is always at least 60% and in practice 70% to 80%. If you can find a stock with a market capitalisation of around €2 billion that you think could be included in the Eurostoxx 50 within ten years, I think you are dealing with a potential winner. All passive funds will then buy that share.’
Keeping your head cool
Lerminiaux experienced many moments of tension during his long career, but has learned to keep a cool head. ‘When volatility rises, you have to stay cool. Usually the market is fairly rational, but every four to six years there’s a big stress moment when you shouldn’t do anything stupid. During moments of fear or greed, you have to remain rational. For example, in the midst of the coronavirus crisis, we decided not to reduce our equity exposure, but to be contrarian and buy. When sentiment is too negative, you must have the courage to buy more, and when it is too positive, you must have the courage to sell.’
Lerminiaux finds the eternal debate between value and growth that has been going on for more than thirteen years now, as a result of the enormous outperformance of growth, rather sterile and even nonsensical: ‘This debate doesn’t make much sense to me. You have to look at it on a company-by-company basis. In every sector you find winners and losers.’
‘Now, however, you would have to be crazy to invest in the next few years in the airlines sector’, he confesses. ‘Outside Ryanair perhaps, which we had in our portfolio. There are sectors that we think will create little value in the years to come. For example, I do not see us investing in banks for the next two years either.’
During the coronavirus crisis, opportunities have arisen for companies with value features, provided that they have not been permanently disrupted, Lerminiaux notes. ‘In the materials and chemicals sectors, you can now find companies that will bounce back as soon as the current crisis has passed.’
Passive encouragement
Lerminiaux encourages people to invest passively, because that creates opportunities for active stock-pickers. ‘I like to see this. People like to have access to indices or benchmarks. The MSCI World is hard to beat. The problem is that certain components reflect the past. If they go out, they already have a heavy value correction behind them. And those that come in are expensive. Think of Adyen for example, in which we have been investing since their IPO. In my opinion, a good stock-picker will still make it in the long term for a passive investor’.
Finally, the stockpicker also pays particular attention to sustainability criteria, especially corporate governance. ‘One might wonder whether the management of companies like Engie or Volkswagen puts the interests of the shareholders first. You see a lot of political appointments there. There are many governance elements that you cannot immediately quantify. However, they are extremely important. In family-run companies, you see far fewer such issues.’
Lerminiaux also points out the importance of compounders: shares of companies that can achieve very high compound growth rates in the long term and thus offer their shareholders a superior total return. ‘Such compounders are very important in a portfolio, and you don’t only find them in the technology sector. A typical example of this is ASML, which is still in the Europe and Euroland portfolios. Such stocks can make a difference in the long term.’
Finally, Lerminiaux gives us a glimpse into his own portfolio. ‘I will continue to be very active in the markets now that I am giving up. I have even more shares in my portfolio than I used to because the bonds yield so little. I do believe in diversification, and my experience does not make me the typical profile. I am a buy-and-hold investor. I still think that’s the best strategy in the long term.’