New Star European Growth

Muna Abu-Habsa, fund analyst at Morningstar: This fund features a seasoned manager in Richard Pease. Pease has maintained a strong association with European equities for the last two decades, executing a consistent investment process and delivering favourable results. He has run New Star European Growth since launch in July 2001, delivering an annualised 4.6% per year over his tenure, trailing only three other peers and outperforming the category average by 3.4 percentage points per year. Pease also achieved similarly strong returns during his stint at Jupiter European Unit Trust (January 1990- December 2000) with annualised returns clocking in at 17.3% per year while his average rival returned 12.8%.

Pease has demonstrated robust stock-picking skills throughout his career. He follows a disciplined investment process which is predominantly bottom-up. To narrow down the investment universe (FTSE Europe Ex-UK index), Pease uses brokers, economic specialists and research houses. He looks for four key factors in a stock. First, he seeks companies with barriers to entry so that they remain buoyant in both up and down markets. Second, he favours business models that are devised to be sustainable for the long term. With that long-term mindset he then looks for cash generative companies where return-on-capital-employed exceeds cost of capital over the long run. Finally, Pease hunts for companies trading at attractive valuations relative to peers and the wider market. This process has yielded a portfolio that is rich in mid caps and skewed towards, arguably, undervalued issues.

The manager's conviction in his picks is reflected in the size of a position. Pease is not afraid to avoid index heavyweights if an investment case is lacking for example Nestle, E.ON and Nokia. Indeed, the fund is largely unconstrained and as a result can appear out-of-step with competition. In 2007 for example, the fund s emphasis on issues lower down the market-cap ladder backfired as larger, more growth-orientated offerings rallied. This fund has been slightly more volatile than its average peer over the last one, three and five years, but over its lifespan volatility has been comparable. Pease's willingness to deviate from the index and take significant sector bets, as well as his recent move to make the portfolio more concentrated, amplify these risks further; Pease cut his financials stake sharply in 2007 and has since kept the number of holdings in the 50s range from its previous 70s.

Pease's extensive experience and proven ability makes this an attractive offering. Nevertheless, expenses are on the high end relative to category peers and these would have to be compensated for through better performance (and thus more risk) as they compound over time. We think highly of Pease and this fund, but it would be an even better choice if it were cheaper.

Strategy

Pease builds his portfolio from the bottom up. He uses long-established relationships with brokers, economic specialists and research houses when screening stocks in the FTSE Europe Ex-UK index for his approximately 50-70 stock portfolio. He looks at four key factors. First, he is drawn to companies with barriers to entry and strong pricing power since these would help keep them buoyant in both up and down markets. Second, Pease assesses management and favours family-run businesses which typically have business models devised to be sustainable for the long term. Third, and with that long-term mindset, Pease looks for cash generative companies where return-on-capital-employed exceeds cost of capital over the long run. This focus on free cash flow is a core part of the process as Pease is keen to ensure that management is allocating cash wisely. Finally, Pease hunts for companies with these criteria which are trading at attractive valuations relative to peers and the wider markets.

New Star hosts a dedicated risk division of two teams: compliance & operational risk and performance & investment risk.

Management

Richard Pease has managed this fund since launch in July 2001. The manager's association with European stocks, however, dates back to the 1980s. Pease started his investment career running two funds for the Central Board of Finance at the Church of England, then moved to Windsor Investment Management where he ran a European fund for two years before joining Jupiter Asset Management. He spent over 10 years at Jupiter and was head of the European equities desk. When John Duffield left to start up New Star, Pease was one of the first managers to go with him. Now director of European equities at New Star, the desk has seven portfolio managers, an analyst and two assistant fund managers, running a total of £1.5 billion in assets. On this fund, Pease works most closely with Simon Rowe and James Milne. Rowe conducts many of the company meetings, identifying the risks associated with potential investments and is aided by his background in management consultancy. Milne draws on his accounting skills in evaluating companies' financials and challenging finance directors.

The manager invests in the fund and we find this encouraging as it reflects conviction in his strategy and aligns his interests with shareholders'.