Richard Pease on Europe excluding the UK — March 2008

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The Dublin-domiciled New Star European Growth Fund, lead managed by Richard Pease, is in the top ten per cent of funds in its sector since launch and has outperformed its index in the first two months of 2008*. The fund, which is AAA-rated by Standard & Poor’s†, did, however, have a disappointing 2007. Below, Richard explains how the portfolio has subsequently been repositioned and why his current holdings are well-placed to weather the storm.

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After disappointing in 2007, the New Star European Growth Fund has started to recover and is back in the top third of funds in its sector in the two months to 29 February 2008*.

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Richard Pease, the lead fund manager, says: “The period of underperformance encouraged us to go through the portfolio with renewed vigour and concentrate on the high conviction holdings. There were no sacred cows. We cut our losses on several banks, moving underweight in the sector, and also cut our positions in erstwhile favourites such as C&C Group, the Irish drinks company, and MAN, the German truck maker.

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While the exposure of the portfolio to industrial cyclical stocks has been reduced, it retains an overweight position because Richard believes there are plenty of quality companies in this sector. “Industrials are a broad church,” he says. “For example, the lift company, Schindler, is classed as an industrial cyclical yet more than 75% of its earnings come from service contracts. Clearly, fewer new lifts are needed if global construction slows but refurbishment programmes and health and safety legislation mean that maintenance demand should remain buoyant, as does emerging market demand.”

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Richard believes there is a disconnection between the nervousness in the financial markets and what is happening in the broader economy. He says: “At the risk of sounding like a broken record, the message being received from company managements is different from that being broadcast by economists.”

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Richard points to the recent good earnings results season as an indication that European companies outside the financial sector are doing reasonably well. He believes the sense of foreboding is distracting investors from some of the excellent value in the market.

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“There are obvious areas of pain, consumer credit is harder to obtain and financial stocks and highly-leveraged players are struggling, but these are the areas we would expect to suffer in a credit crunch,” says Richard. “The companies we speak to describe robust conditions and this is supported by recent strong economic data, such as rising German exports in January and higher French industrial production. Many holdings are reporting long order books and high cash balances; they go into any downturn better prepared than they have probably been in a generation. Other stocks in the portfolio are benefiting from some of the market’s concerns. Fortum, the Finnish power group, for example, has climbed on higher energy prices.”

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Even those companies in the thick of the storm such as Randstad, the Dutch recruitment company, and Grafton, the Irish builders merchants, look appealing. Richard says: “These are not ridiculously overvalued dotcoms with barely-fleshed out business models but fundamentally sound companies. Management are clearly confident as they have respectively engaged in acquisitions or bought back shares.”

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Richard believes the low valuations on companies in his fund will lead to an upturn in merger and acquisition activity. “In the near term companies are likely to want to conserve cash and preserve strong balance sheets but the opportunity to do deals — even at big premiums — for a fraction of the prices possible a year ago will tempt buyers back,” he says. “The portfolio has a weighted estimated free cash flow yield of 9% excluding financials; such a level discounts a lot of potential pain and is also likely to flush out predators keen to take advantage of the low valuations among the companies held.”

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On the economy, Richard is sanguine about the stoicism of the European Central Bank (ECB). “The ECB is determined to prove it is not soft on inflation so aggressive rate cuts are unlikely on this side of the Atlantic even if you think we are merely lagging events in the US,” he says. “The sensible bet, however, is that the ECB is not going to vote for a Kamikaze recession. If conditions deteriorate, rates will be cut. Its participation in the concerted boost to liquidity in March shows it is prepared to act when necessary.”

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*Performance at 29 February 2008. Launch date 16.08.2002. Data source: © 2007 Morningstar, Inc. All rights reserved, base currency euros, net of fees, gross income reinvested. For performance purposes the New Star European Growth Fund is measured against the FTSE World Europe ex-UK Total Return Index and is in the Equity Europe excluding UK sector.

†Rating at 29 February 2008.

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Past performance is not necessarily a guide to future performance. The opinions expressed here represent the views of the fund manager at the time of writing and should not be interpreted as investment advice.

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Important information

Past performance is not necessarily a guide to future performance. The value of investments and any income from them may fall as well as rise and investors may not get back the amount originally invested. The value of investments may also increase or decrease as a result of changes in exchange rates between currencies. Investments made in the fund mentioned in this document involve certain risks, as described in the relevant prospectus. Any opinions expressed in this document may vary without prior notice and do not constitute investment advice.

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This document is for professional investors, other financial institutions and professional advisers only and should not be provided to or relied upon by private investors. This document should not be distributed to any third parties and does not constitute an offer or solicitation to anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such offer or solicitation. Details of where the fund mentioned in this document is authorised for distribution are provided. Distribution of this document and the offering of shares in certain jurisdictions may be restricted, and accordingly persons into whose possession this document comes are required to inform themselves about and to observe such restrictions. If this is the case, the fund cannot be the subject of active marketing in your jurisdiction.

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The fund mentioned in this document should be viewed as an investment suitable only for investors who can fully evaluate and bear the risks involved. Full details of the fund can be found in the prospectus or Offering Document, in the case of Hong Kong. Any investment decision must be made solely on the basis of the information contained in the prospectus/Offering Document, the simplified prospectus, the Articles of Association and the most recent annual and interim reports which are available upon request.

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The shares referred to in this document have not been and will not be registered under any United States securities laws, and, except in a transaction that does not violate the United States securities laws, may not be directly or indirectly offered or sold in the United States of America, or any of its territories or possessions, or areas subject to its jurisdiction or to or for the benefit of a United States person.

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The New Star Global Investment Funds PLC (the Fund), of which the European Growth Fund is a sub-fund, is regulated by the Irish Financial Services Regulatory Authority (Irish Financial Regulator). The Manager of the Fund, New Star Investment Funds (Ireland) Limited, is regulated by the Irish Financial Regulator. The Investment Manager, New Star Asset Management Limited, is regulated by the Financial Services Authority of the United Kingdom (the FSA). The custodian is State Street Custodial Services (Ireland) Limited.

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The Fund has been registered for distribution in Denmark with the Danish Financial Supervisory Authority, in Sweden with the Swedish Financial Authority, in Finland with the Finnish Financial Supervision Authority, in Malta with the Malta Financial Services, in France with the Autorité des Marchés Financiers, in Spain with the Comisión Nacional del Mercado de Valores under number 407, in the Netherlands with the Autoriteit Financiële Markten, in Italy by the Bank of Italy and in the United Kingdom with the FSA. Fortis Foreign Fund Services Ltd., Rennweg 57, P.O. Box 8021, Zurich has been appointed as the representative of the Fund in Switzerland. For Hong Kong: The Fund has been authorised by the Securities and Futures Commission (the SFC). Authorisation by the SFC does not in anyway imply any official approval or recommendation by the SFC. In Singapore the sub-funds are recognised as Restricted Collective Investment Schemes by the Monetary Authority of Singapore.

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For your protection, calls are recorded and may be monitored.

This document has not been verified or approved by any relevant supervisory authority in the jurisdictions where the Fund is registered.

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Issued by: New Star Asset Management (Bermuda) Limited.

For further information contact the local representative Jesmond Mizzi Financial Services Limited on 21224410.