Strength in numbers

Teamwork. That is what Grant Forster, co-manager of the Royal European Growth fund, says is the source of strength for BT Funds Management, the investment advisor for the fund. BT Funds Management is the largest manager of retail unit trusts and the third largest institutional fund manager in Australia.

The teamwork spirit permeates the halls of the Sydney-based offices of BT Funds Management. "It gives us a distinct advantage," Grant says. "Our equity investment teams cross-fertilize their ideas with each other." Each team member is part of a regional equity team, and also part of an industry-specific team. For example, a European team member may also sit at the telecommunications team table. What is the point in all this? "Discipline," Grant says.

"Every stock we own is not just a decision of the European team," he says, "but has also been analyzed by an industry team." The BT Funds Management European team does all their research in-house, quantitatively analyzing and screening over 750 stocks from the MSCI Europe index. "We narrow it down to an active list of 250 stocks," he says, "and about 50-60 make it in the portfolio." With ten analysts in the European equity team, each is expected to intimately know 10-20 companies inside-out. "We take calls with the CEOs, we travel all the time," Grant says. "We get to know these stocks better than anyone else." Then they rank the stocks by three criteria: the quality of the business franchise, the management and the stock's valuation.

"We are not a value manager," Grant says. "We are willing to pay a reasonable price for growth. Valuation represents only a third of the way we rank our stocks." The analysts also put a lot of emphasis into management transparency, or how accessible and open the management is. Analysts observe a company's managers in a global context, how they handle the company's capital and how they do acquisitions.

"We review and possibly revise the rankings constantly," Grant says. "It is not an automatic trigger to buy, just a discussion point." By ranking the stocks, Grant says that they introduce accountability in the decision-making. "It's a good way to construct portfolios," he says. They discuss stock ideas at a weekly meeting, but the final responsibility falls to Crispin Murray, head of the team. "It is not a star manager system, we all feel like equals," Grant says, "but someone has to shoulder the responsibility for the investment."

The team also has rigid risk management screens to track the portfolio's assumed risk and trigger flags at specific situations, such as when a stock position goes over 3 per cent of the portfolio. This is another example of the disciplined approach at BT Funds Management, where the team methodically manages the portfolio with a watchful eye.

Grant says the portfolio is overweight in technology, media and business services and is underweight in telecoms and biotech stocks. They are also quite negative on UK financials. Some of the stocks they like are:

• Total Fina (recently merged with ELF) is an oil producer that earns U.S. dollars and has a Euro balance sheet, so the devaluation of the Euro is helping the company right now. The team also likes the cost savings associated with the company's restructuring.
• Nokia ranks really high on their list, with high scores for management quality. "They are in a good industry and reported higher earnings last period."
• Intershop Communications provides business-to-business services in Germany. Also Getronics, a Dutch company. These are the B2B plays for the fund. "It comes back to economics," Grant says. "Efficiency of resources and cutting out the middleman."

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.