Citywire AAA-rated growth manager Carl Auffret is turning his back on the food and beverage sector with his once favored bet now almost entirely absent from his portfolio.
This is despite the sector having represented a significant portion of holdings over the last six-to-seven years in his DNCA Invest Europe Growth fund, with notable positions in Nestlé, Givaudan and SAB Miller.
‘I was a big fan of these firms but nowadays not anymore. I have little exposure left here because either growth has vanished or because valuation has jumped through the roof,' Auffret told our sister publication Citywire Selector.
'Consumer staples are very expensive, not necessarily because growth has accelerated but because they are perceived as bond proxies. They are only expensive because interest rates are low, which is a rather poor reason to be expensive.’
Rising interest rates are likely to lead the sector to underperform, he said, which is reason enough to steer clear of the sector.
Auffret said healthcare is expensive but has nonetheless won favor and makes up 25.5% of the portfolio. This includes investments in pharma, med-tech and services related to the ageing population.
‘It's logical that these companies are expensive but they aren't outrageously expensive because EPS growth is likely to be at least in the mid-teens.’
Auffret singled out med-tech as having been a strong contributor to the fund. He said it is a very heterogeneous sector with various sub-industries, including biotech equipment, diagnostics, and private hospitals.
‘On the med-tech side, it’s interesting because most of them are defensive so they don't depend on the macro environment. Also, there are a lot of opportunities in the sector in Europe.'
Auffret’s strategy requires a 5% minimum organic growth for companies in its investment universe, which creates a significant sector bias.
He has substantial overweights in healthcare, auto suppliers, defence and technology companies, while avoiding financials, commodities, oil, utilities and media stocks.
‘As a growth investor we focus on quality and have a tendency to like the mid-cap space because, by definition, it is easier to grow when you are doing 50 million sales rather than 1 billion.'
This has created a structural bias in the fund to mid caps, which make up 40% of the portfolio, he said.
Over three years to the end of March 2018, the DNCA Invest Europe Growth fund has returned 19.46% in euro terms while the Citywire-assigned benchmark STOXX Europe 600 TR EUR returned 3.05% over the same period of time.