Bruno Le Chevallier : « We have got rid of all banking stocks and have expanded sales to insurers »

Created 10 years ago, the fund “CCR Opportunity” has gone through many crises. It proved to be able to protect investors’ assets, even including two major financial crises, with a 10-year performance of 43.51% (August 31, 2011).

Do you think the current crisis is similar to those experienced in 2003 and 2008 ?

Bruno Le Chevallier, fund manager of CCR Opportunity: Having experienced the 1981 and 1982 financial krachs, the 1987 krachs, August 1990 (Gulf War), 1998, 2001 (Internet bubble) and 2008, I can say that each crisis is different.

The situation we have been experiencing since this summer looks partly like 1998’s krach, which also began with a sovereign risk - in Asia - before intensifying with Russia’s default and the fall of LTCM hedge fund. At that time, banks were losing 10% every day and the crisis lasted about two months. The cure came from the rescue of this hedge fund and Fed’s rate cut.

This time, the credit and sovereign risk through countries’ debt is located at the heart of Europe and the United States, and leads to a more complex situation which takes more time to handle.

How did the fund do regarding this summer’s last events?

Both good and bad. In early summer we were quite worried about the situation in Europe despite the Greek bailout and, therefore, we had no banking stocks in portfolio, but the sharp downward revision of U.S. growth in the first and second quarter of 2011 triggered a correction much stronger than we expected in August. Then the shaky compromise on the cap of U.S. debt has triggered a confidence crisis in financial markets that has spread within the European financial system. The sharp rise in volatility and risk aversion weighed on all indices as the Eurostoxx 50 lost more than 13.79% for the month of August while the CAC 40 index lost 11.33%. If we look at the year’s highest levels we had during spring, it is nearly a 30% decrease for both indices. Such a brutal and fast adjustment is quite rare; there were only about a dozen of them since 1954. CCR Opportunity lost 8% over this period, and 8.07% since the beginning of the year, against -17.57% for the Eurostoxx 50 and -14.4% for the CAC 40.

First, we remove from the fund’s portfolio all the banking stocks despite their undervaluation, while we expanded those sales to all insurers also involved in the sovereign risk. We reduced the weight of stocks while taking profit on values such as SAP, Dassault System, Safran, Givaudan. We sold some cyclical stocks such as Alcatel or oil services as Amec PLC, Fugro and a portion of our allocation into CGG Veritas. Thus, the equity weighting went from 82% in early summer to 70% in late August, including a financial operation triggered on Delachaux, a firm which accounted for 3% of the fund.

At the same time, we increased our exposure to two defensive stocks: Mobistar and Edenred.

What are your current preferred investment themes ?

As I already mentioned, we avoid all financial stocks (banking and insurance).
Among the themes that we prefer at the moment, we favor mobility and safety theme with two high quality French stocks: Gemalto and Ingenico. We also like all of the food chain with Syngenta (seeds), Yara (fertilizer), K+S (potash and salt), and agro-chemicals such as German companies BASF and Bayer, after their fall.

We also played the renewable energy theme with stocks such as SAFT, or SOI, which develops an ambitious project in solar power with the support of strategic investment fund which has taken a 12% stake.

The portfolio remains widely diversified with a mix of defensive stocks and cyclical stocks. Some of the values held seem to have already incorporated the assumption of a recession, such as Peugeot, which is valued 30% of its equity, and about 4 times its results, or Bouygues that is the subject to a takeover bid for 11% of its shares at a price 30% higher than the current price.

Equity markets are overall very cheap, especially compared to the bond markets (long-term rates between 2 and 3% in northern Europe), unless we enter a long lasting recession, or similar to that of 2008 which was particularly tough.

Today, European equities return more than 5%, cost 9 to 10 times the results. These are very attractive levels even if the political and economic uncertainties have rarely been so high

What are the holdings of the portfolio?

The fund is 70% invested in equities and remains diversified with nearly 100 stocks, the most important of them being Total (3.5% of portfolio). French stocks account for 60% of the portfolio and the remaining positions are mainly invested in northern Europe (Germany, England and Switzerland). Less than 3% of the portfolio is invested in southern Europe stocks, including names like ENI in Italy.
The last 30% not invested in equities are primarily invested in cash.

What is your outlook ?

The market will remain volatile and will rely on the application (or not) of financial measures announced at the 21st of July summit (Greek rescue plan, strengthening of the European emergency fund ...)

Ultimately, the way out of these financial crises will be through decisions and political choices. Europe has no choice but to move forward, and in an optimistic scenario, we believe the market could bounce back by about 10% to 15% by the end of the year.