The bear market has emboldened competitors and frayed client relationships. Meet 25 equity analysts at major European asset managers who are rising to the new challenges.
By This feature was compiled by Senior Editor Jane B. Kenney; the following profiles were written by Jeanne Burke, Michael Dumiak, Hugh Fraser, John Hintze, Ben Mattlin, Scott McMurray, Suzanne Miller, Sharon Reier, Mike Sisk (who also wrote the overview) and Alison Zomb.
Institutional Investor Magazine
Investors have an irritating habit of paying much closer attention to their money in bad markets than they do in good times. Right now they're watching like hawks.
For the first time since the early 1970s, European investment managers have had to contend with two consecutive years of negative stock returns. Bull market stars like Alcatel, Marconi and Zurich Financial Services have imploded, and the Dow Jones Euro Stoxx 600 index of European shares has dropped 22.2 percent since the end of 2000. Researchers everywhere have some explaining to do. Their clients, ranging from individuals with a few thousand euros to giant pension funds overseeing billions, want to know what happened to their cash. More important, they want to know whether the rest of their fortunes are secure.
The precedent-setting lawsuit filed by Anglo-Dutch consumer products behemoth Unilever, charging that Merrill Lynch & Co.'s Mercury Asset Management unit strayed from its original investment brief, underscores the fraying of the investment manager,client relationship. Even before the suit went to trial last fall (it was ultimately settled out of court, reportedly at a substantial cost to Merrill), the Myners report, released in March 2001 by the British House of Commons' Trade and Industry Select Committee, warned U.K. pension trustees to be more vigilant in overseeing their fund managers' investment strategies. Also in Britain, a new accounting rule, FRS 17, requires that companies mark their pension assets to market and recognize any shortfalls on their balance sheets. The result? A number of leading U.K. companies are shopping around for less expensive, less volatile instruments, most notably fixed-income securities, which outperformed stocks in both 2000 and 2001.
Equity asset managers are feeling the pinch. National mutual fund associations in France, Germany, Italy, Spain and the U.K. reported that at the end of 2001, the average equity allocation in a mutual fund , 35.4 percent , was 6 percent below its three-year average, according to Fidelity International. "A lot of investors headed toward cash last year, and that's something we haven't seen in quite some time," says Frederic de Merode, the mutual fund giant's London-based investment director. Adds Arno Kitts, head of U.K. institutional investment at J.P. Morgan Fleming Asset Management, which manages $600 billion globally, "There have been lower returns in the equity markets, and therefore the asset allocation trends in Europe are changing." Private equity, convertible bonds, foreign currencies and so-called alternative investments like hedge funds and real estate are all competing for assets with actively managed equity funds.
In one of the more dramatic examples of this trend, U.K. retail chain Boots Co. announced in September that it had yanked its entire £1.7 billion ($2.72 billion) stock portfolio out of the market and put all the proceeds into bonds. Out went Boots' longtime equity fund manager, Schroder Investment Management, and in came Legal & General Investment Management to handle the fixed-income portfolio. In a letter to The Observer of London, Boots corporate finance chief John Ralfe explained that the shift was "not about accounting but about reducing risk for Boots' shareholders, creditors and pension scheme members." According to Ralfe, by investing in bonds between early 2000 and September 2001, Boots reduced its annual investment costs an eye-popping 97.5 percent , from £10 million to £250,000.
But such volatile times and intense investor scrutiny also gave the best analysts at Europe's money management houses a chance to show their stuff. To determine which researchers most distinguished themselves over the past year, Institutional Investor polled brokerage analysts who received votes in the 2002 All-Europe Research Team. Using these votes, we selected 25 of the most accomplished researchers for our second annual European Best of the Buy Side. All won their peers' respect for some well-informed skepticism.
The most esteemed money managers stuck to their investment strategies, didn't buy shares simply because they were cheap and tended toward caution early in the year. Many focused on a handful of high-quality companies that could withstand a slow-growth economy. Nearly all jumped into the market in late September to buy stocks they wanted to own for the long term. As Capital International Research's Andy Griffiths, one of this year's distinguished buy-siders, explains, "You have to have the courage of your convictions." That was never so true , or so difficult , as in 2001.
These days analysts are being asked not only to have convictions but to explain them clearly. The European buy side is no exception. Pension fund trustees want "to understand what you've bought, to understand the level of risk in a product and the wider implications of that risk throughout the portfolio," says Divyesh Hindocha, European partner at pension fund consulting firm William M. Mercer. Reining in costs is also a priority, he says. Pension fund trustees are particularly concerned about transaction fees, which are not included in the total cost of running a fund. "There's a desire for greater transparency of these fees," says Hindocha. "The idea is not to reduce the number of transactions but to make sure they are efficient."
Money managers are trying to respond. For instance, this year Schroder, with $160 billion under management, has already held three "jargon-busting" seminars to educate pension fund trustees: Topics include asset allocation, the role of research, fixed-income instruments and the job of the equity manager. "You need to explain to clients exactly what drives the investment process and the thinking behind it," says Nick Anderson, head of the firm's pan-European asset management.
Changing client demands have prompted Fidelity International to reach out in new ways. In April 2001 the firm created a market analysis and portfolio strategies group to keep clients informed about broad market trends and how specific funds or investment styles fit into the bigger picture, says Fidelity investment director de Merode. "There's a definite trend of wanting to understand the main themes that have led to underperformance and why we bought what we did."
Explaining painful results is one thing; offering painless remedies another. A number of investment managers say they want to avoid a knee-jerk reaction to weak markets. Leslie Manookian, director of European growth equities at Alliance Capital, says that aside from a shift out of technology, media and telecommunications into areas like capital goods and building materials, her firm "has not changed research or redeployed resources and has in fact started to reinvest selectively in TMT." After all, long-term growth is still more likely to come from technology stocks than from steel shares.
And Schroder's Anderson speaks for many buy-side colleagues when he says that even the difficult markets of the past couple of years don't warrant a complete rethinking of the way research is organized. "These things ebb and flow over time," he says. "You've got to plan for the long term and ride it out." If anything, Anderson says, the bear market underscores the value of buy-side research, which takes great pride in objectivity. Schroder is emphasizing its managers' experience in a range of market environments, too. Four years ago 20 percent of the firm's analysts had more than five years' experience. Today 60 percent of its staff do.
Still, the competition from other types of assets is real. "Where institutions might have been happy with index tracking when underlying markets were delivering double-digit returns, they are now considering taking a little risk to improve returns by a small amount above single-digit returns," says J.P. Morgan Fleming's Kitts. "Institutions are looking at a broader set of asset classes." In response, his firm is offering more private equity and currency overlay products and has developed enhanced-index and low-risk equity alternatives.
What many investors are seeking is a way "to smooth out returns and get positive results" that beat cash equivalents, de Merode says. Ironically, their quest may contribute to market volatility. That's because more money is going into hedge funds. From a few billion euros in assets several years ago, European hedge funds today control more than E50 billion ($44.5 billion). Their average holding period for a stock is just four days, and in some trading sessions they account for half of total market volume. As a result, prices tend to swing much more violently than they once did. Chris Cheetham, global CIO of Axa Investment Managers, which has E257 billion under management, says: "We're seeing much more serious evidence of mispricings. Markets don't move in proportion to news flow; prices move more than they should."
Of course, it's up to buy-side analysts like those featured here to use the sharp price breaks to snap up their favorite stocks. "In turbulence there are opportunities, as long as you keep your head," says Kitts.
AXA INVESTMENT MANAGERS
Armed with a 1994 Ph.D. in biochemistry and physiology from the University of Manchester, John Bowler knows a lot more science than your average stock researcher. But the Axa Investment Managers analyst believes that his education gave him something equally valuable: "I'm not afraid to find things out for myself. There's a parallel in the methodical approach of academic and investment research , being prepared to identify issues and then dig deeper."
He did some digging back in January, when Ireland's Elan Corp. announced temporary problems with its product pipeline; the stock price dropped about 75 percent between mid-January and mid-April. At first, Bowler, 34, thought the weakness might present a buying opportunity, but his probe of the balance sheet convinced him to stay away. "Elan has a lot of debt instruments that all mature in the next few years, very closely together, so they have a bit of a [cash] squeeze ahead," says the London-based Bowler, who covers 30 companies for Axa. The firm has E257 billion ($229 billion) under management.
At major medical conferences, which Bowler attends at least twice a year, the analyst earns praise for his ability to ferret out the real news. "There will be 20,000 people there and thousands of papers presented," says one sell-side analyst. "The key is to understand the importance of products from an investment standpoint and then hunt down the data to decide whether a drug will do well or not." That's where Bowler excels.
At one conference in late 2000, Bowler became bullish on a new version of Pharmacia Corp.'s hypertension drug eplerenone when he learned that it had fewer unpleasant side effects than rival products. Other analysts missed the significance. Bowler reports that the new version of eplerenone has not yet had an impact on the company's stock price. Even if it doesn't dramatically increase overall sales, the drug will "help sustain Pharmacia's growth rate for a number of years," he says.
SCHRODER INVESTMENT MANAGEMENT
It required more than a little fortitude to buy insurance stocks right after September 11, but 28-year-old Zafar Ahmadullah persuaded his bosses at Schroder Investment Management ,European assets under management: £12.1 billion ($17.9 billion) , to make a big move into Munich Reinsurance Group on September 12. Ahmadullah believed that the company's clean balance sheet would carry it through any downturn. He jumped in when the shares sank to E207 ($189), compared with E273 on September 10. Munich Re recently traded for E295.
"People thought the whole industry was going to collapse," Ahmadullah recalls.
Despite his youth, the Bombay native is a veteran trader whose parents gave him some money and allowed him to start trading at age 13. "I tried to buy big value situations," he recalls. "Sometimes I thought something was expensive, but it wasn't, because it was still growing. Or it might have been cheap, but for a good reason."
In 1996, after earning a commerce degree from Bombay University and a law degree from the University of Cambridge, Ahmadullah took a job in Schroder's London office, covering Indian companies. Three years later he shifted to European insurers; today he focuses on 16 large caps. "He's sharp, alert and intelligent," says one sell-side analyst. Ahmadullah also doesn't suffer fools gladly. "If someone goes in front of him with an investment case he considers poorly structured, that person will not enjoy the process."
Ahmadullah's astute stock picking has won him a broader brief at Schroder. In March 2000 the firm handed him the reins of SISF Euro Equity, a Luxembourg-listed, E450 million general equity retail fund. Today assets total E1.8 billion, and the portfolio has returned 3.89 percent for the first quarter, compared with a 1.49 percent return for its benchmark, the MSCI European monetary union index.
As an analyst of cyclical stocks, Alliance Capital's Robert Alster looks for companies that can "grow beyond the cycles." Tracking 16 European large-cap auto and capital goods makers, the 41-year-old University of Edinburgh graduate bets on high-quality, long-term growth companies with "a sustained competitive advantage" over rivals. Case in point: French aluminum producer Pechiney, which Alster likes for its highly efficient operations and diversified revenue stream , it makes alloys and packaging materials as well as aluminum.
A "thinking man's analyst," in the words of one brokerage acquaintance, Alster worked as a market forecaster for British Coal Corp. and as a researcher at Robert Fleming & Co. , now J.P. Morgan Fleming Asset Management , before joining Alliance in May 2000. Along with his responsibilities as a capital goods and auto analyst, he serves as research director of European growth stocks. (Alliance Capital manages $7.6 billion in European equities.)
The London-based Alster frequently visits the companies he covers. He traveled to Phoenix, Arizona, to investigate an equipment rental subsidiary of Swedish industrial equipment maker Atlas Copco before recommending the shares last November. The stock was down to 220 kronor ($20), Alster explains, "reflecting a very negative view of the U.S. rental market." But his visit confirmed that "an economic recovery would hit soon," he recalls. By April the stock had jumped to Skr240.
Last year, after reading a magazine article about Bayerische Motorenwerke's soon-to-be-introduced Mini brand, its redesigned X5 sport utility vehicle and the latest incarnation of its 7 Series, Alster decided to reassess the German carmaker. In May 2001 he recommended BMW stock; by this April the shares had surged 27 percent, after the new lineup helped increase first-quarter car sales 17 percent. "He spots the key issues," a sell-side counterpart attests, "and he asks the right questions."
GOLDMAN SACHS ASSET MANAGEMENT
Autos, Industrials, Engineering
"He has convictions," says one sell-sider, "but he is calm in controversial discussions." Even as he halved the number of stocks in his stable last year, from 40 to 20 , he's moved to all large caps , the understated Kamran Baig has expanded his reputation as a shrewd and tactful forecaster.
The London-based analyst tracks airline, auto and engineering stocks at Goldman Sachs Asset Management, which has $30 billion in European equities under management. That's not all. The former design engineer, who graduated in 1991 from London Business School, serves as head of GSAM's European equity research and also manages the firm's year-old Global Infrastructure and Resources Fund, which has $8 million in assets.
No one has ever mistaken the 39-year-old Baig for a cheerleader. "The problem we face in our business is marketing, marketing, marketing," says one sell-side analyst. "I like people who get straight to the point." The GSAM analyst does.
Baig won't discuss his stocks, but analysts say he made a prescient call last year on ABB, the Swiss-Swedish engineering giant. When CEO Goran Lindahl, former chairman Percy Barnevik's chosen successor, was ousted in favor of Jörgen Centerman at the end of 2000, investors cheered. Baig, however, felt that expectations had become overly optimistic; sell-siders say he recommended getting out of ABB at the end of the first quarter, when it was trading at Sf35 ($21). In July the company announced a 76 percent collapse in first-half net income, from $1.09 billion in 2000 to $266 million in 2001, as well as 12,000 job cuts. The stock recently traded at Sf14.
Baig also made some smart buys last year, analysts report, pointing to a bullish call on French construction giant Lafarge when the company bought Blue Circle Industries, a London-based cement maker. Investors sold Lafarge after the deal was announced, citing sluggish demand for cement. But Baig reportedly focused on cost savings, recommending the stock as the July deal closed and the price hovered at about $35. It sank to $32 by September but recently traded at $45.
Harlan Carere took an unusual route to a research job. As a teen-ager, he designed, sewed and sold clothes from his family's home in Toronto. After graduating from Montreal's McGill University in 1993, Carere opened ten retail stores selling midpriced women's clothes and ran the business at a profit for the next three years. Although he sold the company in 1996, the experience has helped him as an analyst: "When I look at financials, I can better appreciate what things really mean, because I've been through it."
Carere came to the London office of Fidelity Investments (approximately $100 billion in European equities under management) two years ago after an internship at Goldman, Sachs & Co. in New York, a spell as a retail analyst for New York hedge fund manager Berman Capital and a stint as a Baker Scholar at Harvard Business School, where he earned his MBA.
The 31-year-old doesn't view his short history tracking semiconductors as a huge impediment. "You can perhaps reach nonconsensus conclusions more easily than someone with deeper experience," Carere says. He is not permitted to discuss specific stocks, but sell-siders say he has a sharp eye for opportunity. According to one, Carere was on target last October when he became an advocate of ASML Holding, a Dutch company that makes high-end equipment for the semiconductor industry. Shares have risen from E9.70 ($8.80) last October to a recent E25.50.
Sell-siders who have dealt with Carere admire his focus and dedication. "He may call five times in one day to get to the bottom of an issue," says one. "He is tenacious." Now Carere is contemplating a modest career shift. "Eventually, I want to be a fund manager ,'eventually' meaning 'soon.' "
L. Alfonso Barroso
Capital INTERNATIONAL RESEARCH
L. Alfonso Barroso likes to visit downtrodden companies, which is not difficult to arrange, given the many Internet companies on his roster. "I'm often the only one visiting," says the London-based analyst and fund manager, who tracks 50 European and Latin American retailing and Internet companies for Capital International Research. (Capital Group Cos. manages $550 billion in assets worldwide.) "Spending one-on-one time lets you develop a level of trust and a sense of where management's strengths lie," adds Barroso, 31. "You can usually tell straight away if they're excited about their business."
Although he won't discuss specific holdings, Barroso does describe his basic investing philosophy: Markets tend to overreact to short-term events like disappointing earnings reports, creating opportunities to buy into "great companies with good management that's passionate about the business."
He chooses stocks that he thinks will outperform over three to five years and uses measures like price-to-book and price-to-sales ratios to assess fair value. "It's useful to have as many methodologies as possible at your disposal," says Barroso, who joined Capital in 1994 after graduating from Harvard College. But there's one constant: He visits corporate management at least twice a year and retail stores "whenever possible." Barroso notes that Capital's ample research budget gives him an advantage over competitors who have had to reduce their travel budgets in the midst of a bear market. "Research is the No. 1 priority here," he declares.
His formidable travel schedule and passion for firsthand information are reflected in his work, say sell-side counterparts. Barroso brings together "detailed company knowledge and global understanding," says a sell-sider. Another researcher recalls a recent conversation about the advantages of satellite-based data transmission: "Unlike a lot of other people who cover the Internet, Barroso was thoroughly up to speed on the latest technology."
GOVERNMENT OF SINGAPORE INVESTMENT CORP.
Energy, Chemicals, Utilities
Alex Cobbold lets his sell-side colleagues pore over spreadsheets. The Government of Singapore Investment Corp. analyst devotes most of his time and energy to debriefing corporate managements. "Covering more than 60 companies, I don't have time for all the minute details," says Cobbold, 35, "so I rely on the sell side for their due diligence on the numbers."
In his chemicals coverage last year, London-based Cobbold provided a glimpse of his methodology. "Starting about year-end 2000, managements were making it clear that they thought the cycle was turning, even though that wasn't yet showing up in the numbers, like ethylene utilization rates," he notes. "We also got the message that these companies were showing discipline in capital spending." In first-quarter 2001 Cobbold turned bullish on the sector, which started showing signs of life in the second half of the year. Share prices for the leading commodity chemicals companies in Europe and the U.S. were up about 20 percent through the nine months ended in mid-April.
Cobbold graduated from University College London and worked for ten years as a U.K. building stocks analyst at Dresdner Kleinwort Benson before joining the $100 billion-plus Singapore fund four years ago.
A sell-side source praises Cobbold's research on BPB, formerly known as British Plaster Board. The GIC analyst was weighing an investment in BPB during the first quarter of last year: Worldwide plasterboard capacity had suddenly increased when Lafarge opened a new manufacturing plant in the U.S.; prices had slumped; and many analysts had turned bearish on BPB. Cobbold became bullish when the stock was trading at about 300 pence ($4.37). The stock sold off gradually after the first quarter, but Cobbold stuck with it, betting that companies would start to close plants and reduce industry capacity, which did in fact occur. Post,September 11 BPB's stock hit a low of 230p. As of mid-April it had rebounded to 408p, producing a nine-month gain of 77 percent.
GARTMORE INVESTMENT MANAGEMENT
Technology, Telecommunications Equipment
While studying modern history at the University of Oxford, Gavin Cart-ledge rowed on the crew team, helping to defeat the University of Cambridge in a still-celebrated 1985 victory. Pulling the oars before dawn, Cartledge came to appreciate the value of hard work , and the simple pleasure of winning. Now 37, he finds a similar satisfaction in his work as a technology analyst at Gartmore Investment Management in London. "I'm fairly competitive, so I don't mind being measured against a benchmark," he says.
"He has a healthy degree of cynicism and likes a debate," says a brokerage analyst.
After Oxford, Cartledge put off plans to go to law school and took a summer job as a junior researcher at London-based Prudential. Discovering that he enjoyed even entry-level number-crunching, he decided to make his career as an equity analyst. In 1986 he joined Invescap (now Invesco), where he spent four years investing in U.K. stocks for pension funds, taking time out to earn an MBA at Columbia University. In 1995 he joined Gartmore ($12 billion in European assets under management), where he now covers 25 information technology stocks, both hardware and software companies. "The business is never dull , it's very fast, and it's always changing," he says.
Never more so than in the past few months. In the run-up to the release of Nokia Corp.'s year-end results, the press and many analysts turned negative on the company. Cartledge thought their pessimism was overdone, and recommended the shares. Nokia ultimately reported better-than-expected results for 2001 and had a brief uptick. But in mid-April the telecom company reported a disappointing first quarter, with net sales down 12 percent. The stock recently traded at $16, down from nearly $26 at the start of the year. By late April there was no word on whether Cartledge had been equally nimble-footed in getting out of the stock.
Gerald du Manoir
CAPITAL INTERNATIONAL RESEARCH
Paris-born Gerald du Manoir has an instinct for the luxury goods business. The Capital International Research analyst certainly used it to good effect late last September, a brokerage counterpart says, when he recommended Cie. Financière Richemont, owner of such tony brands as Cartier, Montblanc and Piaget. The Zurich-listed shares had hit a low of Sf26 ($16.25) at that time, down from a June peak of Sf47. By early April of this year, they had rebounded to Sf38.
Du Manoir earned an international finance degree from Institut Supérieur de Gestion and has spent the past 12 years as a consumer products analyst at Capital, which manages $550 billion in assets worldwide. From his Los Angeles office, he tracks 70 European companies and also manages some institutional money. "Gerald loves the industry," says one sell-side acquaintance. "Over the years he has developed excellent contacts within the major companies." Adds another colleague, "He has lots of experience and good instincts."
The 35-year-old du Manoir won't reveal specific stock picks, but he will say that last year divided into two distinct periods , before and after September 11 , that required different investing strategies. Before the terrorist attacks he favored defensive plays like tobacco and beverage companies, which tend to post fairly predictable earnings gains even in recession. At the same time, he steered clear of more volatile luxury goods stocks.
By late September, however, the battered prices of many luxury stocks, like Richemont, had begun to look appealing, while defensive consumer stocks hadn't been as hard-hit and were losing some of their appeal. Du Manoir reportedly made just two defensive exceptions: U.K. food and drink group Diageo and Dutch beer maker Heineken, based on the strength of their global brand names.
ABU DHABI INVESTMENT AUTHORITY
Oil & Gas, Utilities
What's the difference between the buy side and the sell side? Brokerage analysts "have to run very fast just to stand still," says Mark Henderson, who worked as a sell-side analyst for Deutsche Bank and Dresdner Kleinwort Benson before joining the Abu Dhabi Investment Authority in 1999. Working for an investment manager, says the 33-year-old Trinity College graduate, offers access to "vastly more information, with more time to sit back, analyze and get a genuine, deep understanding of what's underlying the market."
It also doesn't hurt to cover oil and gas producers and utilities on behalf of the investment authority. "Oil isn't just at the heart of this region's economy; it is the economy," says Henderson, who lives in Abu Dhabi. "You've got an explosion in social obligation, and oil is the revenue generator. Managing the price is the key way to maximize your revenues. Achieving oil prices above $20 [a barrel] becomes an economic necessity."
In mid-1999 Henderson made a bold prediction that OPEC would drive prices from $18 a barrel to as much as $25. Throughout 2000 and most of 2001, oil prices hovered near $20. But Henderson stuck to his call, even as most analysts predicted that slack demand and jostling between OPEC and Russia would push prices closer to $15. Following renewed violence in the Middle East, Iraq's refusal to ship oil and political upheaval in Venezuela, prices shot up to $26 last month. Says one sell-sider of Henderson, "It's not like we're telling him things , he's telling us."
Sell-side analysts note that Henderson's vantage point gives him added insight into specific stocks. Since last July he's preferred BP to Shell Transport and Trading Co. "I thought BP would be better able to respond to a changing environment," he says. Indeed. By the end of March, BP shares were outperforming Shell by 21 percentage points.
J.P. MORGAN FLEMING ASSET MANAGEMENT
In his 13 years as a banking analyst for J.P. Morgan Fleming Asset Management, Kristiaan Gommeren has learned that it's better to be early than late. That's why he recently logged a trip to Central Europe, investigating the potential markets for Western European banks that are expanding there. "The region's formerly state-owned banks have just begun to restructure , I'm early," concedes the 40-year-old researcher. "But I'm going to see when these banks might start making some money."
Western European banks would be well advised to pay heed. In mid-2000 Gommeren, whose firm oversees $44 billion in European assets, advised reducing holdings in Spanish banks with significant Latin American exposure, even as their share prices were rising, because he believed that they had underestimated Argentina's problems and overpaid for several acquisitions. He then made a trip to the region in early 2001 and confirmed his analysis. The stocks peaked in late 2000 and have underperformed the banking sector ever since. "Kris has very clear valuation targets, and he knows when things should stop going up," says a brokerage analyst. "He mixes bottom-up research with a top-down view," adds another sell-sider.
A University of Antwerp graduate who holds an MBA from Columbia University and divides his time between London and Brussels, Gommeren likes the combination of macroeconomic theory and basic business analysis that comes with the banking beat. Over the years he has especially come to appreciate the advantages of prosaic and reliable corporate vision. "I prefer rather boring but value-creating stories," he notes. These days he likes French banks BNP Paribas and Société Générale for their healthy, consistent earnings growth and their potential to expand in foreign markets. "They are making good returns in their home retail markets, and they also have international holdings, which make them attractive merger partners."
CAPITAL RESEARCH CO.
Technology, Basic Materials
Nicholas Grace produced and pored over countless spreadsheets early in his career, when he was a commodities researcher at J.P. Morgan Investment Management. A bit boring, perhaps, but that discipline, coupled with a creative streak, has served him well during his four years as a technology and basic materials analyst for Capital Research Co. (Capital Group Cos. manages $550 billion in assets worldwide.) "He has out-of-the-box thinking in terms of how to look at a company and break it down into constituent parts," says a brokerage counterpart.
London-based Grace, 36, a New Zealander with an MBA from the University of Wisconsin, has won the respect of sell-siders for sticking to a long-term strategic view of each company's management and business model. "If you look back at the ten companies he covers in my sector, you can see he's done the right thing. He's got a great track record," says someone who deals with him often. Grace is said to spend a lot of time talking to consumers and system integrators, trying to piece together the entire marketplace. As a result, declares one sell-sider, "he avoids booby traps."
One trap Grace reportedly avoided last year was German software company SAP. Given the company's size , E7.4 billion ($6.5 billion) in revenue in 2001 , "if you get SAP right, it helps you get the rest of what's going on in Europe right," explains an analyst. Notes another researcher familiar with Grace's work, "Grace was one of the few who saw a valuation issue when the stock was riding high." After peaking last year at $49.10 on January 31, SAP fell 35 percent by year-end. (Grace was unavailable for an interview.)
Sell-side analysts appreciate Grace's willingness to swap ideas. "We often end up on a Friday talking on the phone," says one. "He'll report what he's learned during the week, and I'll tell him what I learned. If you have that kind of relationship, you work that much harder for him."
J.P. MORGAN FLEMING ASSET MANAGEMENT
Energy, Chemicals, Paper & Packaging
"He puts you through the mill," says one sell-sider of J.P. Morgan Fleming Asset Management analyst Steven Ho, whose firm manages $44 billion in European assets. "But his questions dig deep, and he gets from us what he needs." These exacting sessions allow the 44-year-old, London-based Ho to track a wide swath of stocks with an unrivaled attention to detail. "He spots trends well ahead of anybody else," says another analyst who's been put through his paces by Ho.
Ho's rigorous search for answers allows him to synthesize many different variables into a single investment decision. "In the sea of data that encompasses energy, Ho has a knack for discerning what's most important," says a colleague. Last December, for instance, he became convinced that oil would not fall below $19 a barrel. So he bought U.K. integrated oil giant BP, choosing it over Shell Transport and Trading Co. in part because of its greater exposure to the U.S., where Ho believed gas prices had troughed; BP's successful cost-cutting initiatives were a further inducement. Through mid-April BP shares had jumped 14 percent, and Shell's had barely changed. Meanwhile, the price of oil climbed to $26 a barrel.
Born in the U.K. and raised in Singapore and Malaysia, the Boston University graduate describes his research as "fundamentally oriented," with a heavy emphasis on cash flow analysis. Last July such analysis prompted him to buy Finnish paper and packaging producer Stora Enso at about $10 per American depositary receipt after disappointing second-quarter results pulled its valuation below book value. "Operationally, the company was generating lots of cash," Ho recalls. By early April the shares had gained 35 percent.
CAPITAL INTERNATIONAL RESEARCH
In the pas de deux between sell-side and buy-side analysts, Andy Griffiths, the 34-year-old banking analyst at Capital International Research, often takes the lead. "Griffiths is respected because he routinely knows as much if not more than the sell side," says a brokerage colleague who knows him well. "He has an infallible sense of when you are bluffing or are on shaky ground."
An accountant with a degree in economics from the University of Liverpool, London-based Griffiths begins with the numbers, then factors in the human dimension of corporate management. "I think about the intrinsic value of the company," he says. "What is the franchise capable of doing? What drives growth and the potential cash flow generation that comes from that? Once you have that, you go out and see management and determine if the guys can deliver on the potential that is in the numbers. You have to have confidence that they can execute."
Griffiths will not discuss specific stocks, but he says that Capital's global research group, which helps the firm and its affiliates manage $550 billion worldwide, is a big asset. "Although banks are still a local business," he notes, "the business is becoming international." As a result, when he analyzes a European institution like ABN Amro, which has a large regional bank in the U.S. and significant Brazilian earnings, Griffiths draws upon the insights of Capital's U.S. and Latin American bank researchers.
In the end, analysts must make the tough calls on their own. In early 2000 Griffiths held on to some British bank stocks as they lost favor; his judgment was vindicated last year, however, when the banks' restructuring programs led to a reevaluation by the investment community as performance improved. "You don't sell when they start to perform," says Griffiths. "You sell when they get up to your valuation. You have to have the courage of your convictions."
SCHRODER INVESTMENT MANAGEMENT
Emerging European Markets
Schroder Investment Management analyst Nadia Kazakova got her start in Siberia, trying to impose Western-style accounting practices on Russian oil producers. As a result, the 30-year-old Belarus native knows something about sifting through reams of information to arrive at an accurate valuation.
Joining Deloitte & Touche's Moscow office after graduating from Moscow State University in 1995, Kazakova spent three years auditing oil and gas conglomerates on Russia's northern frontier. "It wasn't easy," she says. "The numbers were mostly reliable, but everything was on paper." The experience taught her patience and persistence that she's put to work assessing financial and energy stocks since 1998 for Schroder and its $7.7 billion emerging-markets portfolios.
One successful example: the Czech Republic's Komercní Banka, a deeply indebted bank that Kazakova recommended several years ago, when it was in sorry shape. "There were lots of bad loans issued by the state, and Komercní was a state-owned bank," she says. Still, she remained optimistic about its prospects for four years, through two government bailouts. Last fall her contrarian bet was rewarded when Société Générale bought the bank from the government for $1 billion , a 60 percent premium to the prebid price. Recently, the stock traded at a slight premium to the bid price. "Kazakova was able to work through the murk and see what was really going on," says one sell-sider.
The London-based analyst currently heads a small team that covers 20 energy and financial companies. Kazakova also manages the four-year-old, $10 million Russia Region Fund and works closely with Schroder analysts in developed markets to help fashion the firm's global view. She hasn't forsaken her roots: Two of her favorite picks are Russian oil producers Gazprom and Yukos.
Capital International Research
Capital Goods, Chemicals, Aerospace & Defense, Technology
When John Longhurst needed to meet with a sell-side counterpart to discuss some stocks, the London-based Capital International Research analyst suggested a rendezvous at a train station coffeehouse on the way home from work , in the interest of saving time. "For John, it's very much a case of 'Give me the important information as quickly as possible,'" says the researcher who met him for coffee.
Longhurst, who never attended college, spent ten years on the sell side as an analyst at James Capel Stockbrokers and UBS. In 1996 he joined Capital, which manages $550 billion in assets worldwide; today he follows more than 100 companies in such diverse global industries as chemicals, defense and media. It can be a challenge finding time to quietly reflect, Longhurst says. "The noise level has increased dramatically, the information has increased dramatically, and the capacity to think has been reduced," says the researcher, who nonetheless continues to excel at his work.
Longhurst, 35, is able to make deft connections between seemingly disparate pieces of information, using them to his stock picking advantage. "When he hears something about one company, he applies that quickly to another company in a way that leverages his excellent knowledge base," says one sell-side analyst.
Although Longhurst declines to discuss specific stock picks, he describes his general approach to investing as an exercise in comparative analysis: "Why did U.S. defense stocks outperform their European counterparts last year? U.S. defense budget growth. Why did small-capitalization machinery stocks outperform their large-cap counterparts? A series of discrete individual company problems.
"If you're doing a good job, you'll get 40 percent of what you do wrong," says Longhurst. "You can't take yourself too seriously, but you do have to love what you're doing."
Utilities, Building & Construction
When he's not scouring spreadsheets, Putnam Investments analyst Hendrik Hijink likes to flip through his bound editions of Dutch satirical comic strip "Tom Poes," which appeared in local newspapers from 1941 through 1986. "It's a mirror of society and politics," says Hijink, who keeps an eye on both as he covers 25 utilities and building materials companies across Europe.
Hijink, 44, joined Putnam, which manages approximately $40 billion in European equities, in 1994 after a stint at sell-side firm Kempen & Co. He's fluent in English, Dutch, German and French and says he can convincingly "fake it" in Italian, Spanish and Portuguese. With an MBA from the University of California, Berkeley, the London-based analyst conducts bottom-up analysis that colleagues call "very deep and extremely perceptive."
Case in point: his call on Spanish electricity provider Iberdrola, whose stock fell 12 percent between October 2001, when it announced a merger with Spanish rival Endesa, and February 2001, when the deal was scuttled. That February Hijink thought investors were overreacting, and he's been proved right. By mid-April Iberdrola's stock was up 11 percent.
Invariably the "first person to ask a piercing question of management," notes one observer, Hijink takes pride in his skeptical approach to corporate presentations. It informed his January 2001 decision to underweight both Italian electric utility Enel and Electricidade de Portugal. He believed that the companies would feel pricing pressure from a growing number of competitors. The shares plunged 25 percent and 37 percent, respectively, between the January 2001 call and late last month.
"He always comes at things from a different angle," says an admiring sell-sider.
Capital International Research
Studying for his Ph.D. in immunovirology at the University of Liverpool, Jonathan Knowles didn't think he'd ever get out of the lab. Eager for a change of venue, he applied to France's Insead, eventually earning his MBA in 1992. Shortly thereafter he joined the London office of Capital International Research, where he's been able to put his long days in the lab to good use covering pharmaceuticals and biotechnology stocks. "Product is everything in this business, and if you have a good R&D pipeline, you'll have good products," Knowles explains. Others say that the analyst has also amassed a pretty good Rolodex of sources in the health care industry. "That gives him an advantage," notes a sell-sider.
The Kenyan-born Knowles, 41, thinks of himself as a long-term investor. "I'm lucky," he says. "This is an industry with long product cycles, so it's well suited to the long-term investing that Capital does." Capital Group Cos. manages $550 billion in assets worldwide.
Knowles, who won't comment on specific stocks, is best known to his sell-side counterparts for a call last year on pharmaceuticals giant AstraZeneca. As far back as four years ago, many investors worried about the October 2001 patent expiration of the company's ulcer treatment Losec (Prilosec in the U.S.), which was launched in 1998 and has been the world's top-selling drug. Based on fundamental analysis and his ability to evaluate the company's forthcoming products, Knowles determined that AstraZeneca would survive the loss. His view led Capital to gradually accumulate more than 11 percent of the company's stock, up from less than 8 percent two years ago.
Good call. AstraZeneca challenged the patent expiration in U.S. court, delaying the launch of generic competitors there through this month. Even if the company loses the case, Knowles expects it to weather the expiration, thanks to a strong pipeline of new drugs. The stock climbed to £31 ($45) by year-end 2001 from less than £28 in October and rose a further £4 through early April, placing it among the best-performing pharmaceuticals stocks during that time. Says one sell-sider, "Knowles had a better appreciation of the quality of the company and its assets than most analysts."
CAPITAL INTERNATIONAL RESEARCH
Technology, Telecommunications Equipment
As a management consultant in Stockholm in the early 1990s, Jesper Lyckeus did a little stock picking on the side, even dabbling now and then in derivatives and foreign exchange. But it wasn't until 1995, when he was a 27-year-old MBA student at France's Insead, that Lyckeus considered a career as an analyst. After listening to a presentation by a Capital International Research recruiter, he decided to try his hand at equity research. "I had been investing for ten years on a small scale, and I realized that I could combine my genuine interest with a profession," he recalls.
Born in Göteborg, Sweden, Lyckeus was hired by Capital's London office to focus on electrical equipment and engineering; a year later he picked up telecommunications equipment and semiconductors. Covering ten large-cap companies in the volatile technology sector for Capital , which manages $550 billion in assets worldwide , Lyckeus is something of an anomaly: He focuses closely on the fundamentals, and he takes a long-term view. "A lot of people just follow the momentum," says a sell-side colleague, "but he is very good at avoiding the noise and not getting caught up in the hype."
Lyckeus certainly shut out the din surrounding U.K.-based Marconi. By 2000 the former defense company had, through acquisitions, transformed itself into a provider of fixed-line telephony equipment, specializing in fiber optics. As investor enthusiasm for the market swelled, Marconi's stock soared, rising from £6 ($9.50) in April 2000 to more than £12 five months later. Lyckeus, however, steered clear. When the boom in fixed-line equipment failed to materialize, the company's debt load became a burden. Marconi's shares had sunk to 6 pence by last month. Lyckeus "never got sucked in," says a fellow researcher; he neither chased nor guessed a bottom for the stock.
As for the analyst's occasional miscues, sell-siders appreciate those, too. "He accepts responsibility for his decisions rather than blaming us. It's refreshing," says a brokerage researcher.
Last May, when Qwest Communications International was still trading at about $37, Victor Moftakhar believed that the shares of the U.S. telecommunications provider looked very vulnerable. After all, the company was continuing to invest heavily in expensive fiber-optic networks, even though demand for that delivery system remained largely hypothetical. The 34-year-old telecom and media analyst at Deka Group, Germany's second-largest investment firm (managing $45 billion in assets worldwide), started to unwind his position, selling as the stock slid from $37 to $30. Smart move: The shares recently traded at $8. Not only is Qwest under federal scrutiny for its accounting practices, it suffered another blow in early April when it announced that it would have to take a charge of as much as $30 billion to write off goodwill resulting from its acquisition of U.S. West.
Frankfurt-based Moftakhar, a graduate of Germany's Johann Wolfgang Goethe-University, also oversees the $2.6 billion Deka-TeleMedien fund; he follows about 50 stocks as an analyst. An avid outdoorsman who's trekked through Thailand's Golden Triangle and parts of Botswana, Namibia and Zimbabwe, Moftakhar is admired for what one sell-sider calls his "genuinely global perspective."
Focusing on debt structure and market position, Moftakhar's research led him to take a cautious view on most European telecoms last year. Moftakhar turned bearish on Dutch wireless company Royal KPN in February when the stock was at about E12 ($10.80). KPN, he noted, was consistently lagging key rivals in market share, especially as it tried to win new German business. By September its stock price had dropped to E2. Following a recapitalization in November, however, Moftakhar warmed to KPN and caught its recent bounce back to E7.
Researching volatile emerging markets for U.K. money manager Gartmore Investment Management in the late 1990s gave Valli Niththyananthan an appreciation for the power of broad macroeconomic forces. So when the native Londoner joined Alliance Capital, which manages $7.6 billion in European assets, in October 2000 to cover luxury goods, she decided to combine a top-down analysis of prevailing economic trends with research into the strengths and weaknesses of particular brands. "If you look back at the impact of the Gulf War and the Asian crisis on the sector, it's clear that top brands like Gucci tend to bounce back and gain ground after a crisis, while second-tier names like Versace suffer," says Niththyananthan.
Though not permitted to discuss individual stock selections, the 28-year-old London School of Economics and Political Science graduate says she favored the premier names in the weeks after the terrorist attacks in the U.S. "September 11 creates a buying opportunity," she thought at the time. Amid widespread anxiety about the global economy, consumption of luxury goods fell for several weeks but gradually improved. Stocks in the sector declined nearly 25 percent last year but rose 15 percent between January 1 and mid-April.
These days London-based Niththyananthan is keen on Switzerland's Cie. Financière Richemont, parent to Cartier, Piaget and Van Cleef & Arpels. She notes that the company was roundly criticized for paying Sf3.08 billion ($1.85 billion) , more than eight times sales , for its 2000 acquisition of luxury-watch assets, including IWC and Jaeger-LeCoultre brands, from Germany's Mannesmann Group. But she asserts that in addition to gaining top-drawer names, Richemont has raised "significant barriers to entry at the top end of the watch market." The stock recently traded at Sf39, down from its September 2000 high of Sf52 but up from its September 2001 low of Sf26.
CAPITAL INTERNATIONAL RESEARCH
Utilities, Technology, Transport
Good research analysts are good interviewers, eliciting important information with tact and finesse. At Capital International Research in London, Gina Miscovich has a special flair for getting utilities, airline and telecommunications executives to offer perspectives they might not have intended, say her colleagues on the sell side. "She really has an ability to let the companies speak , and she can ask a question in such a way that management doesn't know exactly what she's up to," observes one sell-sider. It helps, of course, to have a first-rate understanding going in: "She knows absolutely everything there possibly is to know about the company," says a brokerage researcher who has watched her work.
"One of the benefits of covering a sector over a longer time period is that I can build relationships with managements," says Miscovich, 39. "Over time, meetings evolve into ongoing discussions rather than simply one hour's dialogue."
The Alaska native earned an MBA from London Business School in 1995 and put in a brief stint as a vice president of global transaction services at Citibank's London office. She joined Capital , which manages $550 billion in assets worldwide , as a utilities analyst in 1997 and now covers more than 60 companies. To keep in contact with all of them, she's on the road about one day a week.
Right now airlines are a particular area of interest. They "will be beneficiaries of any global recovery, and if there is a strong U.S. recovery, the outlook for the carriers could be quite positive," she says. Which telecoms will survive? "Companies that can adapt quickly, rather than forecast perfectly, are more likely to be successful," says Miscovich, declining to specify stock picks.
Robert von Rekowsky
Emerging European Markets, Oil & Gas
Earning his master's degree in international relations and comparative politics from Boston's Northeastern University, Robert von Rekowsky honed an ability to make sense of seemingly unrelated economic and political forces. That talent serves the Fidelity Investments analyst well as he manages his current brief, following central and Eastern European emerging equity markets as well as pan-European oil services , 50 companies in all. (Fidelity manages about $100 billion in European equities.)
Last year, for example, the 35-year-old, London-based analyst made use of both of his investment mandates when he examined the Blue Stream gas project, a joint venture among Italy's ENI and Saipem and Russia's largest company, Gazprom. The pipeline, which is being laid by Saipem across the floor of the Black Sea and will bring Russian gas to Turkey, is "technically unprecedented," von Rekowsky says. His regular contact with the three companies convinced him of Saipem's ability to build the pipeline successfully and on time; he also understood the project's political importance to Gazprom. On research projects like these, von Rekowsky's "passion for politics" and "superior information" usually lead to first-rate analysis.
An early proponent of Russian oil shares, von Rekowsky grew even more enthusiastic after September 11. Persuaded that Russia would not cut oil production, despite pressure from Saudi Arabia, he remained bullish. Most analysts underestimated Russia's resolve and set demand estimates too low. "Our argument that Russia still had room to grow played out pretty well," von Rekowsky says. Oil- and gas-related issues make up 70 to 75 percent of the country's stock market. Last year the Russian Trading System index rose 82 percent, and it's up 49.5 percent from its October 3 low. These days, though, the analyst wonders whether the government will be able to implement all of its planned reforms. As a result, he's a little more cautious on the Russian market.
GOVERNMENT OF SINGAPORE INVESTMENT CORP.
Aerospace & Defense, Information Technology Services, Multi-Industry
Andrea Shen is a woman on the run. Not only does the Government of Singapore Investment Corp. analyst travel regularly to investigate the companies she covers, but early last month, jet-lagged after just two days back in London from her semiannual meeting at Singapore headquarters, she hopped on the Eurostar to run in the Paris marathon.
"Running for me is a form of meditation," says Shen, 32. "While you are running, you can think over certain things."
Shen, who grew up in Taiwan and attended Brown University in Rhode Island, has a lot to think about. After working at Lehman Brothers in New York as a sell-side analyst, she moved to Singapore, then to London, for GIC, which oversees more than $100 billion worldwide. Says one brokerage colleague: "Andrea has outstanding knowledge about the drivers of the industry. And she has developed a network of contacts second to none." She follows companies like General Electric Co. and Tyco International; in the past year both former market darlings have been the subjects of speculation about accounting practices and future growth prospects. Tyco fell almost 23 percent in a single day earlier this year; GE fell nearly 9.3 percent in one day.
Although Shen declines to discuss current holdings, she was an owner of Accenture, the IT services company that broke off from Arthur Andersen in 2000. Those shares rose 77.5 percent from Accenture's July IPO through December 31.
She's preparing for more volatile times ahead. "This year will be a tough year for everyone," Shen says. "The market's reaction to problems is to sell and ask questions later."
Luxury Goods, Beverages, Household & Personal Care Products
"He has a natural flair for sniffing out a spurious story," says one sell-side analyst of Alexander Zavratsky. Back in March 2000, just before the bubble burst, Zavratsky, then a telecommunications analyst at Fidelity Investments, urged selling tech shares. The 28-year-old, Austrian-born analyst, who now follows luxury goods, spirits and cosmetics companies for Fidelity, which handles $100 billion in European assets, doesn't dwell on that call, attributing it to "simple common sense."
His sell-side peers, however, compliment his knack for seeing the larger trend in a particular news item. "Many analysts in this sector are much more interested in short-term events, like a share buyback or something that's happening to the CEO," one sell-sider notes. Zavratsky says he's always trying to piece together the bigger picture: "Let's say Japanese travel is down 40 percent , well, what's the underlying trend? You have to see through the numbers to understand where a company will be three to four years from now."
London-based Zavratsky, who earned an MBA in finance from Boston College, likes the hands-on quality of tracking luxury goods. "If you have a glass of Johnny Walker Black, you have an idea of what it tastes like versus the competition. You can put together a whole valuation chain," he says. When he's not testing a company's goods, Zavratsky is usually visiting its headquarters; he's on the road almost every week.
Although the researcher isn't permitted to discuss his stock picks, those familiar with Zavratsky's thinking say he became keen on French luxury goods company LVMH Moët Hennessy Louis Vuitton at about the time its shares fell to a 52-week low of E28.40 ($26.34) on September 21. Says one acquaintance, "I know Alex eventually got on board and has made out pretty well." LVMH shares were recently trading at a much loftier E60.
The bear market has emboldened competitors and frayed client relationships. Meet 25 equity analysts at major European asset managers who are rising to the new challenges.