M&G’s Kelly Bets on Former Highflyers Like Novo to Trounce Peers

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(Bloomberg) — M&G Plc’s Shane Kelly is beating 91% of European-focused equity fund managers by snapping up former investor darlings he avoided for years because their valuations were too high, including Novo Nordisk A/S.

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The deputy fund manager of the firm’s €8 billion ($9.1 billion) European Strategic Value fund has in recent months added names such as Diageo Plc and Heineken NV that are languishing well below their highs of the past few years. The same holds true for healthcare picks like Novo and Sanofi SA.

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Unlike typical value funds that gravitate mainly toward financials and cyclical sectors, Kelly searches within the cheapest quartile of every industry to avoid concentration. He looks for companies with strong fundamentals that he believes the market is unduly pessimistic about. 

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“We’re starting to see names that probably two or three years ago we wouldn’t expect to be owning,” he said. “Are they fundamentally sound? Are they not a value trap? Then we’re comfortable owning them.”

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Following strong performances in Europe’s energy and banking sectors this year, active managers are looking out for pockets of value elsewhere. Kelly, however, is sector-agnostic and avoids getting drawn into macro trends.

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His fund has returned 24% over the past year, placing the portfolio’s performance in the top 10% of European equity funds. The benchmark, MSCI Inc.’s European Net Return Index, gained 20%. The fund has beaten 98% of peers over a five-year period.

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The bulk of his portfolio still consists of bread-and-butter value names. These include financial stocks such as Banco Bilbao Vizcaya Argentaria SA and Erste Group Bank SA. He also is overweight on ArcelorMittal SA, a stock that once was cyclically depressed but now delivers strong returns.

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Kelly funded some purchases with profits taken in banking and defense shares. In the case of Diageo, he believes management has a range of options to revive growth for a stock that has fallen 17% from this year’s peak and trades at 13 times forward price-to-earnings, compared to a five-year average of 19.

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Kelly isn’t convinced that Diageo, the owner of alcoholic brands such as Smirnoff and Guinness, will suffer from healthy-living trends among younger consumers.

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“When I talk to friends and family that have teenage children, I don’t get the sense that it changed quite significantly,” he said.

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Kelly followed a similar logic for healthcare, buying companies that have been hit by rising competition, patent cliffs and slower growth. 

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Novo, the Danish obesity drugs pioneer, is down 20% from its peak in January and trades at 15 times forward price-to-earnings, below its five-year average of 26. He believes the market is underestimating the strength of the franchise and the industry’s long term-growth potential as treatments become more affordable.

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In the case of ArcelorMittal, Kelly argues that the stock has been punished due to weakness in Europe’s steel industry, even though the company has global operations. 

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Kelly said policymakers are starting to recognize the strategic importance of domestic steel production, which should improve industry dynamics and allow space for the stock to move higher. 

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“Last year, you have seen that with the German stimulus,” Kelly said. “What you get with that process is stocks that are often sitting there waiting for a positive surprise.”

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