This is an article based on the transcription of the recording of this Talking Heads podcast
Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Each week, Talking Heads will bring you in-depth news and analysis on the topics that really matter to investors. My name is Andy Craig, co-head of the Investment Insights Centre, and I’m joined today by Valérie Charrière, deputy head of European large cap equities at BNP Paribas Asset Management. Welcome, Valérie, and thank you for joining me.
Valérie Charrière: Thank you, André. It’s great to be here.
THAT: In this episode we discuss our active management approach to European equities. How do you select stocks? Do you have a particular bias, and if so, what?
Capital risk: We have a team of nine portfolio managers/analysts and we are dedicated to fundamental stock selection: selecting 35-45 top quality stocks whose quality and strengths we can clearly assess.
THAT: This begs the question: what are the characteristics of a stock that you believe make it exceptional for investing?
Capital risk: Quality companies are highly correlated with what we call pricing power. A company’s pricing power provides greater predictability in terms of sales momentum or margin improvement. When selecting quality companies, we must first evaluate the industry structure in which the company operates and then look at the company’s competitive advantage within that industry.
We pay a lot of attention to understanding what is happening to each sector: is it consolidating or is it already consolidated? Industry structure is a key determinant of quality. When you invest in a sector that is consolidating or where there are fewer players, you have de facto a certain stability in terms of pricing power of the sector leaders.
It is important for us to understand whether the leaders we identify in a given sector can maintain this advantage in the medium term. For example, do they have a specific advantage that is not easy for their competitors to replicate, such as their size or a particular technology? Their advantage could also lie in a change in management with better vision or come from industry disruption. There are several aspects to understanding the quality of each company.
THAT: Is it possible to have a quality business in an industry that you believe does not have all the attributes of a “safe” industry – not vulnerable to rapid change? Or do you select the industry first and then look for the exceptional companies within it?
Capital risk: As sector specialists, we first identify a growing industry, even if it is not yet well structured, or if it is about to consolidate because there are too many players.
We identify the specific attributes of a company in the sector, whether they relate to technology, its end market or whether its relationship with suppliers is unique.
Perhaps the hardest part is when it comes to large cap stocks: there can be many divisions, market segments and different sectors. It is necessary to understand the evolution of market shares in each division or in each of the company’s business units. It takes time, but it’s rewarding because ultimately we can say with some certainty that the company’s attributes are good, and it’s a company that’s in a consolidating industry.
THAT: Could you give an example of an industry that you consider favorable and another that you consider less positive?
Capital risk: What is interesting about analyzing the structure of the industry is that it is always in flux. One industry that has consolidated a lot is industrial gases; there is a strong correlation between fewer players and an impressive improvement in terms of margins, so we used to [invest in] two companies, convinced of the interest of consolidation and of the way in which pricing power could develop.
We also invest in more fragmented sectors. In food retailing, for example, the Internet and e-commerce have led to accelerated fragmentation. It is therefore more difficult to find the right player because you have to watch out for discounters who are engaged in a price war.
THAT: How is your approach different from that of other European stock pickers?
Capital risk: Our disciplined approach to in-depth research and understanding of different industries makes our team unique from our competitors. Our team’s decision-making process is also important: no one person owns the whole thing, even if they are an industry specialist. We must present a strong case that we will discuss together before reaching consensus through a vote.
THAT: Looking at the European equity market as a whole, how do you see its evolution between now and the end of the year? There is a lot of talk about tight stock market valuations. What is your opinion ?
Capital risk: European stocks have gained 10% since the start of the year and over 12 months, they are still recording appreciable double-digit growth. At this point, there is likely a stretched value. We expect a slight recession and the next quarter will be a reality check in terms of what’s happening with consumers, the prices companies are setting since Covid and the rise in commodity prices.
For us, the asset class offers interesting diversification. The market is not driven by seven “super stocks” – as is the case in the United States – but we have a wider choice in terms of financials, industrials and luxury goods. We believe this asset class has even more value to offer and we remain positive on our stock selection. Since we invest in quality companies, we believe they can absorb economic shocks or geopolitical challenges better than their peers.
THAT: Financial stocks represent around 15% of the European equity market. Which other sectors have a significant weight in the composition of the market?
Capital risk: Industrial products, capital goods and luxury goods, including cosmetics and beauty markets, are strong in Europe. It is interesting to note that even a large American cosmetics company is currently considering being listed on the Paris Stock Exchange to benefit from this halo effect of luxury products alongside the biggest French brands.
THAT: Environmental, social and governance considerations are fundamental in your approach. How do you take ESG factors into account in your stock selection?
Capital risk: Our exclusive research on each case makes it possible to integrate the company’s ESG score, provided by the BNP Paribas Asset Management Sustainability Center. We make sure we understand the score well and interact with extra-financial analysts who can provide insight into companies in terms of ESG issues that our financial analysts do not have. In constructing our portfolio we also consider engagement, whenever we believe the company can do better.
Thus, we take into account all the knowledge and expertise that the Sustainability Center can provide us, and thanks to our voting rights as a shareholder, we can have a positive impact on company policy.
THAT: Valérie, thank you very much for joining me.
Capital risk: Thank you, André.
This is an article based on the transcription of the recording of this Talking Heads podcast
Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Each week, Talking Heads will bring you in-depth news and analysis on the topics that really matter to investors. My name is Andy Craig, co-head of the Investment Insights Centre, and I’m joined today by Valérie Charrière, deputy head of European large cap equities at BNP Paribas Asset Management. Welcome, Valérie, and thank you for joining me.
Valérie Charrière: Thank you, André. It’s great to be here.
THAT: In this episode we discuss our active management approach to European equities. How do you select stocks? Do you have a particular bias, and if so, what?
Capital risk: We have a team of nine portfolio managers/analysts and we are dedicated to fundamental stock selection: selecting 35-45 top quality stocks whose quality and strengths we can clearly assess.
THAT: This begs the question: what are the characteristics of a stock that you believe make it exceptional for investing?
Capital risk: Quality companies are highly correlated with what we call pricing power. A company’s pricing power provides greater predictability in terms of sales momentum or margin improvement. When selecting quality companies, we must first evaluate the industry structure in which the company operates and then look at the company’s competitive advantage within that industry.
We pay a lot of attention to understanding what is happening to each sector: is it consolidating or is it already consolidated? Industry structure is a key determinant of quality. When you invest in a sector that is consolidating or where there are fewer players, you have de facto a certain stability in terms of pricing power of the sector leaders.
It is important for us to understand whether the leaders we identify in a given sector can maintain this advantage in the medium term. For example, do they have a specific advantage that is not easy for their competitors to replicate, such as their size or a particular technology? Their advantage could also lie in a change in management with better vision or come from industry disruption. There are several aspects to understanding the quality of each company.
THAT: Is it possible to have a quality business in an industry that you believe does not have all the attributes of a “safe” industry – not vulnerable to rapid change? Or do you select the industry first and then look for the exceptional companies within it?
Capital risk: As sector specialists, we first identify a growing industry, even if it is not yet well structured, or if it is about to consolidate because there are too many players.
We identify the specific attributes of a company in the sector, whether they relate to technology, its end market or whether its relationship with suppliers is unique.
Perhaps the hardest part is when it comes to large cap stocks: there can be many divisions, market segments and different sectors. It is necessary to understand the evolution of market shares in each division or in each of the company’s business units. It takes time, but it’s rewarding because ultimately we can say with some certainty that the company’s attributes are good, and it’s a company that’s in a consolidating industry.
THAT: Could you give an example of an industry that you consider favorable and another that you consider less positive?
Capital risk: What is interesting about analyzing the structure of the industry is that it is always in flux. One industry that has consolidated a lot is industrial gases; there is a strong correlation between fewer players and an impressive improvement in terms of margins, so we used to [invest in] two companies, convinced of the interest of consolidation and of the way in which pricing power could develop.
We also invest in more fragmented sectors. In food retailing, for example, the Internet and e-commerce have led to accelerated fragmentation. It is therefore more difficult to find the right player because you have to watch out for discounters who are engaged in a price war.
THAT: How is your approach different from that of other European stock pickers?
Capital risk: Our disciplined approach to in-depth research and understanding of different industries makes our team unique from our competitors. Our team’s decision-making process is also important: no one person owns the whole thing, even if they are an industry specialist. We must present a strong case that we will discuss together before reaching consensus through a vote.
THAT: Looking at the European equity market as a whole, how do you see its evolution between now and the end of the year? There is a lot of talk about tight stock market valuations. What is your opinion ?
Capital risk: European stocks have gained 10% since the start of the year and over 12 months, they are still recording appreciable double-digit growth. At this point, there is likely a stretched value. We expect a slight recession and the next quarter will be a reality check in terms of what’s happening with consumers, the prices companies are setting since Covid and the rise in commodity prices.
For us, the asset class offers interesting diversification. The market is not driven by seven “super stocks” – as is the case in the United States – but we have a wider choice in terms of financials, industrials and luxury goods. We believe this asset class has even more value to offer and we remain positive on our stock selection. Since we invest in quality companies, we believe they can absorb economic shocks or geopolitical challenges better than their peers.
THAT: Financial stocks represent around 15% of the European equity market. Which other sectors have a significant weight in the composition of the market?
Capital risk: Industrial products, capital goods and luxury goods, including cosmetics and beauty markets, are strong in Europe. It is interesting to note that even a large American cosmetics company is currently considering being listed on the Paris Stock Exchange to benefit from this halo effect of luxury products alongside the biggest French brands.
THAT: Environmental, social and governance considerations are fundamental in your approach. How do you take ESG factors into account in your stock selection?
Capital risk: Our exclusive research on each case makes it possible to integrate the company’s ESG score, provided by the BNP Paribas Asset Management Sustainability Center. We make sure we understand the score well and interact with extra-financial analysts who can provide insight into companies in terms of ESG issues that our financial analysts do not have. In constructing our portfolio we also consider engagement, whenever we believe the company can do better.
Thus, we take into account all the knowledge and expertise that the Sustainability Center can provide us, and thanks to our voting rights as a shareholder, we can have a positive impact on company policy.
THAT: Valérie, thank you very much for joining me.
Capital risk: Thank you, André.
