Dominic Wallington

Manager sees "areas of weakness and areas of strength" in Europe.

Michael Ryval 10 December, 2010 | 7:00PM
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The notion of Europe as a monolithic market is unfounded, argues Dominic Wallington, lead manager of the $1.7-billion RBC European Equity  .

"Europe is strictly a taxonomic label and doesn't mean anything. There are many different things happening in different parts of Europe," says Wallington, CEO and chief investment officer of London-based RBC Asset Management UK Ltd., a unit of RBC Global Asset Management. "The Scandinavian countries have been incredibly healthy. Germany is growing extremely quickly. Its exports are expanding very aggressively."

Still, countries such as Britain and France are not doing well. And the so-called "Club Med" countries -- Italy, Spain and Greece -- are mired in recession. "There are areas of weakness and areas of strength. To look at Europe and say, 'it has a problem' is too reductive," says Wallington, who believes that since the 2008 financial crisis, global politics and central-bank policies have had greater sway than markets.

"Because we have quantitative easing (by central banks) and it dovetails nicely with policy changes in China, we have international companies that are doing exceptionally well."

While Wallington spends some time on macro issues, he devotes most of his energy to stock-picking. Working alongside David Lambert and Michael Joynson, Wallington uses an in-house screening system to rank companies and focuses on those with robust returns.

"We're interested in the spread between the business's return over the cost of capital. That is how the net present value of an organization grows," says Wallington, adding that the combination of high return and asset growth is the main driver behind the growth of a company's intrinsic value.

Dominic Wallington

Burberry Group PLC is a representative holding. The UK-based fashion retailer has restructured and improved productivity through rationalization. It has also rejuvenated its product lines after they lost some of their cachet.

Now the company is cashing in on its popularity among the rapidly growing middle classes in the emerging markets, where the company's brand is highly desirable. "If we (UK companies) have power, it's 'soft' power," says Wallington. "I was in Hong Kong a few months ago and Burberry has very high visibility. It's perceived to be a 'classic' brand."

The stock has more than doubled from the £4.25 it fetched in mid-2009, when Wallington bought it. He has no set target, choosing to monitor its operational momentum.

There are about 65 names in the fund. Single holdings are limited to about 3.5% of fund assets. Portfolio turnover was moderate, at 60.8% for the year ended June 30.

Wallington began his career in 1991 after he graduated with an MA in finance and investment from University of Exeter. He started working on an income and small companies fund for Credit Suisse Asset Management, under the tutelage of Bill Mott, who provided guidance. In the UK, income funds invest in stocks with high dividends.

In 2000, Wallington joined Invesco in London as a UK equity manager. Later, he was transferred to its operations in Henley-on-Thames, where he managed several continental European funds for institutional clients. That opened up his interest in Europe. "It wasn't a grand career design. Just a consequence of what happened when the company re-organized."

In 2007, Wallington was hired as chief investment officer at RBC. Besides assuming the $114-million RBC International Equity, Wallington also took over the European fund from Vittorio Fegitz and began to make some changes.

"I felt that we were headed for a crisis and predicted we would have a protracted downturn. I made the fund more defensive, buying telecommunications and pharmaceutical names," says Wallington.

That year, the fund lost 1%, versus a 2.9% loss for the benchmark MSCI Europe Index (C$). In 2008, the fund's 34.5% loss lagged the index slightly because of a partial currency hedge. Last year, it returned 9.2%, versus 16% for the index. Wallington underestimated the strength of the rebound, which did not reward defensive names.

On a year-to-date basis, the fund has been flat and lagged the index by a small margin. Wallington attributes this to not taking larger positions on its winning bets. "But we're starting to be more aggressive on our active positions. I'm very happy with the portfolio."

One larger holding that has been profitable for the fund is The Swatch Group AG, the Swiss-based watchmaker. Like Burberry, it is seeing strong sales in emerging markets, as well as volume growth in traditional European markets. The company's return is four percentage points over its cost of capital.

"It's a positive spread business and the asset growth is also very good," says Wallington, who bought the stock about a year ago. "Swatch has taken the Omega brand back to the top end of the market, where it used to be. The branding success, especially in China, has been very profound."

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Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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