"We work to ensure that the returns we generate are higher than those of the market over the long term"
As part of the "MAPFRE AM Interview of the Month" section, we talk to Thomas Nugent, European equity manager and MAPFRE AM Good Governance. He tells us about the fund's strategy, his main bets and his forecasts for the equity markets. In his opinion, it is good news that global investors' interest in European equities is returning.
- Tell us a little about your professional background, what led you to work at MAPFRE and what is your day like in the company.
I started working at the largest insurance company in Ireland and, in 1997, I joined the variable income team at MAPFRE. In 2006, I changed to BBVA as an Insurance industry specialist and I have been managing dividend funds, European variable income funds and global technology funds. I also worked on Asset Management strategy. I went back to the MAPFRE Asset Management team in 2018 and joined the variable income team.
Our mandate is generating profitability for MAPFRE, for our mutual funds, pension funds and employment plans.
We work to ensure that the (risk adjusted) returns we generate are better than market returns in the long-term. On the team, we invest directly in European companies to achieve our customers’ investment objectives and we do the same in the MAPFRE Good Governance fund.
Day to day, there are many tasks, but the focus has to be knowing the business and the companies where we invest very well, avoiding bad investments and, therefore, achieving the goal of long-term returns.
Why MAPFRE? In my job as an Insurance specialist, I learned that the Group has a very good reputation among the large European insurance companies. I greatly value the culture we have at MAPFRE and MAPFRE Asset Management is a team of great professionals.
- You manage funds on the European stock exchange, which have yielded good profits at the start of the year. To what do you attribute this success?
We manage for the long-term, and can't be distracted by the short-term movements. Nearly all the stocks that have gone up most at the start of this year are those that lost the most in the first nine months of 2022 (with drops over 30%). What we see as a positive is the return on interest in European variable income on the part of global investors.
- What lessons do you draw from such a difficult year for the markets as 2022?
The 2022 year was marked by the turnaround in interest rates, especially in terms of magnitude and speed, and impacted negatively on all asset types. The era of cheap financing is over and in many Developed Markets, rates are at 15-year highs. The effects of such a traumatic change in interest rates have yet to filter through in some assets.
Every year we have unexpected events, such as the war in Europe which has been going on for almost a year.
- The stock markets have in fact closed their best January since 2001, are there logical reasons behind this rally?
After a bad year in 2022, investors are hoping for something better this year, and after such aggressive movement on the interest rates, it is expected that the worst has passed; also, we see how inflation in the US has improved, and has softened somewhat in Europe. Maybe the difficult adjustment we experienced through 2022 is almost over.
Another factor we see is the return of European investors, who have taken investment out of Europe for years, pushing for a stronger Euro and higher yields.
- Do you think this optimism will be maintained or could we experience another correction in the short term?
Several variable income strategists expect a correction in the stock markets in the first quarter with the release of corporate earnings; it's still early, but so far the earnings season hasn't been too bad.
Another issue is the gap between what central bankers think about inflation levels and interest rate levels versus the opinion in the markets; that gap could lead to a correction if we see a bad surprise with the inflation data.
But it's not our job to make predictions; our job is to know the companies where we invest.
- In your funds, you have large exposure to the financial sector, why?
If we look at the broad European index by industry, in the period between December 2010 and December 2022 the best sector by total return (price+dividend) is Insurance with +275% compared to +135% for the index. We understand the insurance sector well; we have been investing in and monitoring some of the insurance companies in our portfolio for twenty-five years.
We also like the business model of some asset managers and, in particular, the structural demand for their alternative management products.
- Let’s talk in detail about the best fund positions and why you see opportunities in these companies.
The best positioned companies are our idea of major conviction: LVMH, Diageo, L´Oreal, Neste, Amundi, NN Group, Novo Nordisk, ASML and Roche. This is a diversified group, but with important traits in common: high (and sustainable) growth levels coupled with high return on capital employed, high (and sustainable) margins, strong cash generation and a very healthy balance sheet. They are quality companies and some are compounders for their growth rate in sales, EBIT, cash generation and returns.
Quality companies have a good ESG rating and lead MSCI (external ESG rating agency) to rate our European equity funds AAA and in the 91st percentile of their global fund universe.
ASML is probably one of the most attractive companies as an investment. This company is an equipment supplier for semiconductor manufacturers, and with its innovation it provides the most important technological advances - Artificial Intelligence, Cloud and 5G, among others. In addition, its technology permeates many industries and facilitates important advances for society. Two months ago, I visited the ASML factory in Holland and in a meeting with its CEO, I saw he was more positive now about the growth outlooks for his company than during the meeting I had with him (and the time to start investing in the business) in 2013. ASML is a high-conviction idea that has made a positive contribution to our customers.
- In an environment of such uncertainty and high volatility, how are you adapting your portfolio and adjusting your strategy?
Valuation is an important part of our investment process. It often happens that a quality company does not trade at a discount, but we may take advantage of volatility and a market correction to add weight to our conviction ideas. With our investment philosophy, portfolio turnover is very low.
- What value does this fund contribute over other similar ones sold by other managers?
At the entrance to our office there is a Warren Buffett quote, “Risk comes from not knowing what you're doing.” And that is effectively true in investment. Our goals are very clear and are embodied in a disciplined and consistent investment process. We think a lot about what we're doing, and how we're doing it (our investment process). We don't copy anyone else's investment style or investment ideas. We have active management, but our fund's risk is lower than other similar one sold by other managers.
- In your opinion, what are the main qualities a manager must have?
You must be clear about what your customer is asking of you, what is the management, what is the risk. You must have a robust and disciplined investment process. You must think a lot about how you manage and about your process.
- Finally, as we often ask in this section, who is your market guru?
Howard Marks. He's not a guru, he's an investor with very broad experience. He explains how we can learn from history and share ideas for better investing.
Travel. I would love to travel to Japan after it has been closed for years due to the COVID pandemic. I also like films a lot.
Traditional home cooking, and especially, a good stew.
And the country, my country, Ireland.
I recommend the last album by Jorge Drexler.