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Comgest equity managers invest as if every holding were a subsidiary of the fund. Each stock must have a distinctive, defendable and sustainable product or service. Each must also deliver strong earnings growth to the benefit of the fund and its shareholders - just like a well-run conglomerate.

‘Each of our chosen companies can grow whatever the economic climate. Of course, we are macro-aware but our investment process is hands on and real. It is about meeting with company management, not just sitting behind a screen,’ says Arnaud Cosserat, investment advisor to the Comgest Growth Europe fund.

The portfolio he runs with colleagues Laurent Dobler and Franz Weis is concentrated. Turnover is also low for a good reason.

‘The fund is grounded in reality, not speculation. We hold an average of 30 companies at any one time and we have held only 100 companies in total over the last 20 years. In truth, there are few companies that deliver the outstanding sustainable growth we seek,’ says Cosserat.

Even so, the macro picture is important. Sluggish global growth and virtually none in Europe have left the European equity market ‘fat and flat’.

‘Volatility and the risk-on/risk-off environment make the market fat. Valuations are low, but when risk is back on, investors get too excited. Then they get burned,’ explains Cosserat. The market is flat too. Positive earnings revisions are scarce, suggesting some stocks will be marked down.

The Pan European equity team tackles these issues by seeking ‘autonomous

growth’ which does not depend on macro conditions. Their favourite stocks are less likely to need bank financing which is in short supply across Europe. They are also innovative, with a strong research trait, and hungry to extend into new territories.

‘You get the impression that companies are drifting in a sea of bad macro news. It simply is not true. Niche players can innovate and tap global, long-term mega-trends. We quiz each management team about their research and investment plans and how they can export their business models from one country to another,’ says Laurent Dobler.

Elekta of Sweden and Essilor of France are good examples of tireless innovators. Elekta recently combined its expertise in cancer radiotherapy with X-ray technology from Philips. The result will be more accurate treatment for patients. Essilor, a very long-term holding, delivers new eye lens solutions like clockwork. As the global population ages, millions of glasses wearers will thank the company for its new anti-blue light and UV protection to slow macular degeneration.

Dobler also highlights Inditex, the Spanish fashion retailer, as a business

model that is readily exported. The company has a 10% market share at home but only ½% elsewhere - a sure indication of its growth potential for years to come.

Likewise, software firm SAP is exporting its expertise into new territory. Its loyal customers like the firm’s software, but often turn to IBM to run their databases. They may now think again as SAP’s new database service is rolled out.

‘Our firms work in the micro-economy, operating in their own business world that is to a large extent independent of global macro. Within each sphere, earnings, growth and commitment are more visible, so we can invest with greater conviction,’ says Dobler.

Comgest Growth Europe stocks are growing faster than the market average. Yet that does not mean they are taking greater risks. The team liken them to ‘Swiss Clocks’ - regular and dependable, with a reassuring tick.

‘These stocks are meeting every day needs in retail and business. They have loyal clients and must-have products and services,’ adds Dobler. Yet not every company in Europe is so lucky, hence the portfolio’s underexposure to chemicals, raw materials and commodities, all markets where customers can go elsewhere and pricing power is easily eroded.

European equity markets are fat and flat. The best growth stocks are not tied to economic recovery

Thinking like a holdingcompany

There are always a few exceptions to the rules. Chemical firm Linde is a long-standing favourite. The majority of its clients are on ‘take or pay’ contracts which protect the company’s revenue streams. The same applies in IT to SAP and Dassault Systèmes. Customers might not buy new products or software, but they always pay regularly for maintenance of the systems they have.

In today’s ‘fat and flat’ market, the key question is whether investors recognise and reward such firms for their rock-solid foundations and growth potential. They certainly do, says Franz Weis.

‘Market expectations are falling. Earnings revisions have been on a downtrend for the last three years. Our companies are moving in the opposite direction. Most delivered almost double-digit growth last year. It would have been more if emerging currencies had not slumped,’ he says.

The true test is fund performance. Between December 2007 and the end of last year, the MSCI Europe index registered a rise of just 6% (net, in euro). The Euro Class of Comgest Growth Europe rose 50% over the same period. The dynamic earnings growth of the selected portfolio holdings should continue to

expand at a similar pace to that seen over the past five years. The team sees over 1,000 companies per year and new ideas continue to appear.

‘We don’t invest by theme, but simplistically. Our stocks play five mega-trends: globalisation or the Western way of life; ageing population; big data; outsourcing; and low cost,’ says Laurent Dobler.

Some stocks span more than one trend. L’Oréal is playing to Western lifestyle aspirations and to the ageing theme. Outsourcing, big data and low cost are often tied together too. Online retailer Asos is not just about online clothes shopping, it is also a global IT and logistics operation.

Comgest Growth Europe stocks share many characteristics with those in the Comgest Growth Greater Europe Opportunities fund, an incubator for smaller, faster growing companies that will eventually find themselves in the larger portfolio once their quality credentials are fully established. These ‘opportunities stocks’ tend to have lower cashflow ratios and smaller profits as they establish their business models, but still boast impressive levels of profitability and sound balance sheet characteristics compared to the overall European market.

‘Stocks in the Comgest Growth Greater Europe Opportunities fund grow their earnings more dynamically but we have to take a bit more risk as a side effect. They are not start-ups, but growing fast and are attractively priced,’ says Franz Weis, who advises the fund with Eva Fornadi and Rebecca Kaddoum.

Selecting the right opportunities is a long process. It can take five years for a stock to be robust enough and cheap enough to find a home in either portfolio. Spotting the

earliest growth stocks is riskier, yet still adds to performance.

‘The Comgest Growth Greater Europe Opportunities fund is less volatile than the index, but not as defensive as the Comgest Growth Europe fund. When the market moves up, Comgest Growth Greater Europe Opportunities participates more proactively,’ says Weis.

To counter higher stock risk, the opportunities fund is more diverse by company and country. It typically holds up to 45 stocks, with stock weightings rarely exceeding 5% of the whole portfolio. Since launch in 2009, the fund has delivered an annualised return of 17.5% against 11.4% for the MSCI Europe index (net in euro as at 28/02/2014).

Security software provider Gemalto is a major position, thanks to its early lead in providing the security software for chip and pin credit cards as well as SIM cards which get upgraded for 4G and contactless payment systems. Hikma, originally from Jordan, is a leading supplier of generic drugs to the Middle East and Asia. French firm Criteo, which helps businesses optimise their online advertising results, is another newcomer. Launched in 2005, it now serves customers in 37 countries from 15 offices worldwide. Sales rose 63% last year.

‘We don’t invest by theme, but simplistically’

‘The fund is grounded in reality, not speculation’

Laurent DoblerArnaud Cosserat Franz Weis