(Bloomberg) -- Investing in construction firms and European banks might not excite investors as much as AI, but such old economy stocks are at the core of the top-performing fund at Lansdowne Partners.
NatWest Group Plc and Lloyds Banking Group Plc are among the top picks for managers of the firm’s $5.3 billion developed markets strategy. They are also invested in building materials firms Cie. de Saint-Gobain and CRH Plc, and steelmaker ArcelorMittal SA.
The goal is to seek out bargains among “the forgotten equities of the last 15 years,” said Jonathon Regis, co-portfolio manager alongside Nigel Hikmet and Peter Davies. The European UCITS version of the fund, which started last December, has returned 17% this year to outperform 81% of its peers, according to data compiled by Bloomberg.
In particular, the fund managers are bullish on banks that make up 23% of the UCITS fund, as valuations are cheap and interest rates are unlikely to return to zero any time soon, supporting lending profits.
European banks trade at an average forward price-to-earnings ratio of 7.3, representing a discount of about 45% to the broader regional market. Lenders are also still about 25% below their long-term average — even after a good few years spurred by post-Covid interest rate hikes. They have jumped 21% in 2024, far outperforming the Stoxx Europe 600’s gain of 7.5%.
Regis believes the increase in spending on infrastructure, energy transition and electrification will need “more aggregates, more steel, more insulation, more glass, more copper, more aluminum.” Building materials industry makes up 20% of the UCITS fund as its second-biggest sector after banks.
Within the energy transition theme, Lansdowne fund managers prefer to invest in supply-chain companies like the Italian electric cable maker Prysmian SpA rather than electrification or renewable projects that have uncertain profitability timelines.
It is not all about the old economy, however. The strategy also has some exposure to technology stocks and prefers companies that benefit from growing demand for robotics, analog chips and cloud services, with Taiwan Semiconductor Manufacturing Co one of their biggest holdings.
(Updates to add banking stocks’ performance in the 5th paragraph. A previous version corrected attribution of quotes in 3rd, 6th paragraphs.)
©2024 Bloomberg L.P.
