After almost 30 years in investment John Bennett has seen it all. This longevity gives the Citywire A-rated fund manager a robust view of the European equity market and investor attitudes.
‘If the market falls by 5% these days, it’s called a slump, 10% it’s a crash. That amazes me. If you can’t afford to lose 25% of your money, please don’t go anywhere near equities. You won’t have lost it unless you sell.'
‘Equities do something called drawdown, it’s what they do – they draw down. What astonished me in recent years is investors saying: “I can’t take a 10% drawdown, let alone 25%.” They shouldn’t be in the market,’ he said.
Bennett adds that a 10%-15% correction in equities is ‘just the tide coming in and out,’ but then he is used to full-on tidal waves.
He started his financial career in September 1987 and just three weeks later he witnessed Black Monday, when stocks fell 25%. However, he thinks significant fluctuations in the market are part and parcel of investing in European equities.
‘I’ve seen the Greek crisis come and go, and it might come again. In Europe you get used to crises. Look at Brexit, the FTSE is now pushing on to new highs. In contrast to the prognostications of the media and politicians, the UK economy is fine. I think crises and so-called crashes will always be with us, they just come in slightly different forms,’ he said.
Bennett has gathered a full stable of funds over the years. For UK investors he runs the £2.1 billion Henderson European Selected Opportunities and £520 million Henderson European Focus funds, as well as its investment trust sibling, the Henderson European Focus Trust (HEFT).
In addition, for investors mainly outisde the UK he runs nearly €7 billion in three Luxembourg-based funds: Henderson HF Pan European Alpha, Henderson Gartmore Continental European and Henderson Gartmore Pan European fund, the last of which includes UK equities.
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In terms of his investment process, Bennett does not want to be pigeonholed and rather than restricting himself to a particular style, he uses several strategies and moves tactically between them.
‘Money management is not about lurching from black to white. You should make incremental changes which add up to something very meaningful,’ he said.
Over the past year, Bennett has tilted towards value but emphasises that he is not a value investor in the traditional sense due to current monetary policy. He said the fund hasn’t had such a high weight in value stocks for several years, but stresses the strategy is not value led.
‘The old rules of value no longer apply. You can’t just rely on a normal cycle – a recession followed by growth, perhaps boom and bust. Typically you would have a cycle in GDP but central bankers, in their wisdom, have decided that they want to abolish this,’ Bennett said.
‘The problem with the zero or negative interest rate policy we have now is that it sustains so many zombie industries, not just banking. It keeps alive too much capacity in steel, glass and aluminium – the classic value sectors. Under the old rules, many of these companies would have gone bust. QE has curtailed this purge, and it is bad for traditional value investing.’
The lack of clear buying opportunities caused by so much QE money sloshing around had mae Bennett increasingly uneasy. He caught attention earlier this year when he warned investors in Henderson European Focus Trust that he might not make them any money this year. In the trust's recent annual results Bennett said this hadn't been such a bad call given how European markets had struggled since the turn of the year.
In the event, Bennett did not do so badly with the net asset value of the trust achieving a 21.1% total return in the year to September, a bit behind the 21.1% return from the FTSE World Europe ex UK index. However, poor investor sentiment to Europe meant the actual shareholder return was just 8.6% as the shares moved from a small premium to NAV to trade at a 9% discount below NAV at the end of the year.
Monetary policy – the wrong drug
While Bennett classifies himself as a bottom-up stock picker and chooses names regardless of the economic environment, he is vocal on the current monetary policy from central banks and thinks QE has failed.
‘I do have a degree of sympathy. I understand why they tried it, despite the fact that money printing has never worked. They wanted to try and stave off a depression. But these are the same people who presided over a debt bubble, and the consequences of the debt binge were that we faced a deflation bust. That is what they are terrified of,’ he says.
‘Unfortunately, as with any drug, the minute you start printing money, the next dose will always need to be bigger to get the same hit. In other words, there is a declining marginal utility. That is why we have QE one, two and three. They now have to keep doing it and bring more punch to the party.’
In Bennett’s opinion the largest and most serious financial crisis caused by central banks was in 2008 and he laments the fact that his grandchildren will still be affected by the credit crunch. He thinks the global economy is beyond the help of central banks and that governments should harness the low interest rate environment to improve growth.
‘There should have been a fiscal response. I understand that is not a central bank response, but a government one. Europe and probably the US should be going on a fiscal splurge. The government has a once in a multi-generation opportunity to take advantage of ridiculously low rates,’ Bennett says.
‘Corporates are doing it – they are issuing 10-year bonds at flat to negative yields, it is astonishing. I think the Swiss, the German, the American and the UK governments should be launching bonds and fixing infrastructure. I think monetary policy has run out of road.’
Unlike a number of his peers, Bennett did not use the volatility caused by Britain’s vote to leave the EU as a way to overhaul his fund. Instead he added small positions in builders’ merchant Travis Perkins and housebuilding company Persimmon Homes, which have risen since June.
‘I think far too much attention was paid to Brexit because London and the City, including myself, thought it wouldn’t happen. You then saw some real panic at the outcome and babies were thrown out with the bathwater. We just picked up one or two of those.'
‘I don’t understand the obsession with volatility. I think the world has gone mad and is creating ever-lower volatility and forgetting about return. I don’t think volatility equals risk. Risk is losing your money. So the risk is our analysis is just downright wrong and we overpay drastically for stocks. If people think volatility is risk, they should put money under the mattress,’ he says.
Bennett says the situation in Europe will always be volatile, noisy and misunderstood.
‘My working assumption is the euro is a mad construct, but we have got it and I think that tail event of “it’s all going to end in tears” might prove true. I don’t think it will come to that in my lifetime, so I don’t tend to worry about it.'
‘As a manager in Europe if you have not learned by now to ignore the macro noise, then you will never learn. It is best just to go and look at the companies, to research them and try and value them, because most of these things won’t happen.’