European Equity Alpha Strategy
European Equity Alpha Strategy

European Equity Alpha Strategy

 
 
 
Summary

The European Equity Alpha Strategy is a concentrated, actively managed strategy that invests in companies listed on European stock exchanges. The Strategy seeks to generate long-term capital appreciation by investing in high-quality companies with sustainable competitive advantages, strong cash-flow generation, and high returns on investment. To help achieve this objective, the Strategy employs disciplined, fundamental analysis to identify those companies that trade at a discount to their long-term intrinsic value.

20%
Typical Turnover
30-50
Typical Number of Holdings
2.5%
Typical Tracking Error
 
 
Investment Approach
Philosophy

The investment team believes that while markets are generally efficient, pricing anomalies exist and can be exploited. The team believes that, in the long run, a stock’s price will ultimately converge with a company’s intrinsic value, but in the short term, the market may overreact to good or bad news, resulting in price movements that may not necessarily reflect a company’s fundamentals.

In the team’s view, however, an attractive share price alone is not sufficient rationale for investment. The team also focuses on companies with strong and sustainable returns on capital and equity, as they believe this will help generate superior long-term returns for investors. In particular, the team seeks companies with high quality businesses, strong management track records and potential catalysts to help realize the stock’s intrinsic value.

 

 
Differentiators
High Conviction Approach

The team builds a concentrated yet diversified portfolio (30 to 50 holdings) that is highly differentiated from the benchmark and focused on the highest conviction ideas. Seeks a profile with lower risk than the index and with more consistent returns.

Established Investment Process

Using active, fundamental, bottom-up stock selection, which is style-agnostic, the team avoids investment trends and maximize the opportunity set. They believe this approach can provide outperformance potential across market cycles.

Stable, Experienced Team

The team has over 20 years of industry experience in European equity investing and is guided by a deep understanding of the local nuances and cultural differences within the European equity markets.

 
 
 
Investment Process
1
Filtering and screening

The team screens a universe of approximately 600 stocks using various proprietary and external screens, with a focus on profitability and balance sheet metrics (i.e., free-cash-flow yield, ROCE, ROE and net debt/EBITDA valuations), mean reversion and absolute and relative valuations. The result is approximately 300 investment candidates that display attractive valuations, strong cash-flow generation and high returns on investment.

2
Research

The team uses both internal and external research to evaluate a company’s business model, capital requirements, industry structure, management quality/track record in generating and reinvesting cash-flow, and product competitiveness. As part of this analysis, the team considers economic conditions and industry trends, which may influence a stock’s long-term potential.

3
Fundamental analysis

After the initial two stages, the team narrows down the universe to approximately 100 stocks and then conducts in-depth fundamental analysis on forecasts and financials—including discounted cash-flow analysis—to determine what they believe to be a company’s "fair value." This analysis is supplemented by regular meetings with company management.

 
 
Portfolio Managers
Head of European Equity Team
24 years industry experience
Executive Director
24 years industry experience
Executive Director
21 years industry experience
Executive Director
23 years industry experience
 
 
Insights
Market Outlook
The Markets - A Review
Oct 31, 2017
Morgan Stanley’s European Equity Team discusses the independence of Catalonia, global fiscal policy and earnings.
Macro Insight
The Markets – A Review
Sep 30, 2017
Morgan Stanley’s European Equity Team discusses the current global economy and earnings expectations as year-end approaches.
Macro Insight
The Markets – A Review
Aug 31, 2017
European equity markets appear fundamentally sound, following a summer that bore witness to consolidation. Morgan Stanley’s European Equity Team explains its outlook for the coming months.
 
 
 
 

RISK CONSIDERATIONS  

Past performance is not a guarantee of future performance. The value of the investments and the income from them can go down as well as up and an investor may not get back the amount invested. There can be no assurance that the strategy will achieve its investment objectives.

Investments may be in a variety of currencies and therefore changes in rates of exchange between currencies may cause the value of investments to decrease or increase. Furthermore, the value of investments may be adversely affected by fluctuations in exchange rates between the investor’s reference currency and the base currency of the investments.

For investments in emerging markets, the volatility and risk to your capital may be greater due to potential price volatility, political and/or economic risks.

Securities of small capitalization companies: these securities involve greater risk and the markets for such securities may be more volatile and less liquid.

Strategies that specialize in a particular region or market sector are more risky than those which hold a very broad spread of investments. Where strategy concentration is in one sector it is subject to greater risk and volatility than other strategies that are more diversified and its value may be more substantially affected by economic events in a particular industry.

Investments in derivative instruments carry certain inherent risks such as the risk of counter party default and before investing you should ensure you fully understand these risks. Use of leverage may also magnify losses as well as gains to the extent that leverage is employed.

 

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS

Discounted cash flow is a valuation method that is used to evaluate investment potential by using future free cash flow projections and discounting them to arrive at a present value.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.

Free cash flow yield is a financial ratio that measures a company's operating free cash flow minus its capital expenditures per share and dividing by its price per share. Free cash flow yield ratio is calculated by using the underlying securities of the fund.

Net debt is a measure of a company's ability to repay all debt if it were called immediately. It is calculated by adding short-term and long-term debt and subtracting all cash and cash equivalents.

Return On Capital Employed (ROCE) is a ratio indicating the efficiency and profitability of a company’s capital. Calculated as: earnings before interest and taxes/total assets less current liabilities.

Return On Equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

OTHER CONSIDERATIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

The weights, tracking error typical yield duration, and the number of issuers represent represent typical ranges and are not a maximum number. The portfolio may exceed these from time to time due to market conditions and outstanding trades. 

 

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