Capitalising on Europe's diversity

Mr Anthony Bolton, one of Fidelity's senior fund managers, likes Europe: its mismatch of national and regional economies, cultures and regulatory systems throws up a host of anomalies. He is also a firm fan of Irish companies, which make up 11 per cent of his portfolio.

Europe's diversity is good for a value investor. "I'm not looking for the best company or the fastest-growing company," Mr Bolton says. "I'm looking for mis-valuation anomalies."

Most fund managers take a different view. They are growth managers that have prospered during the bull market, finding it easy to pick growing companies. But in the current bear market, Mr Bolton's value approach, which thrived unusually in the bull market, offers lessons for survival in Europe.

In the long run, he says, the anomalies may be ironed out as globalisation and closer European integration exert a unifying force. But in the meantime they provide investors with the chance to find cheap or undervalued stocks.

Mr Bolton's classic anomaly is the Republic. He says it benefits from the multi-speed nature of economic growth in the European Union.

"The big flaw in the euro concept is the single interest rate," he says. "It means the rate is wrong for most countries: it's either too restrictive or too relaxed. You're getting faster growth at the periphery, since the interest rates are not high enough for the little countries."

The Republic is seeing tremendous growth and it is not going to stop anytime soon. "In the old days, a boom like that would have ended in a bust," he says. "Interest rates would have been jacked up and the economy would have slowed down - but that can't happen."

Nearly 11 per cent of his portfolio is invested in Irish companies, according to the latest published figures. He has a significant stake in Irish Life & Permanent, although his biggest Irish bet is the Bank of Ireland. "The value investor in me says there is an anomaly - why should an Irish bank with better growth prospects be valued more cheaply than other banks in Europe?"

He says Bank of Ireland stands to benefit from the Republic's corporate tax rate, which is among the lowest in Europe. "This will give [the bank] an opportunity to involve [itself] in tax arbitrage. Why shouldn't a German company borrow against its German earnings, put the money on deposit in Ireland and pay a tax arbitrage?"

Europe's national and other wrinkles offer often unrecognised merger and acquisition opportunities. "I like to orientate my portfolio towards industries or companies where there's a higher likelihood of M&A activity," he says, "and if I'm not paying extra for that, then it's quite nice to have."

Early on he built up a stake of more than 2 per cent in Credit Lyonnais, the French bank. In July, the core shareholders that ensure the bank's independence will be free to sell their stakes.

But if Mr Bolton is a value investor, he does not refrain from putting money into classic "growth" stocks. Again, the quirks of Europe allow him to do this.

His prime example is Alma Media, a Finnish company. It has, he explains, an unusually large share of the domestic market thanks to the oddities of the Finnish regulatory system. It owns the leading television and radio stations in Finland and controls some of the leading newspapers. "You wouldn't be allowed that kind of cross-ownership in Anglo-Saxon markets," he says.

His strategy seems to work. His flagship Fidelity European Fund, introduced in 1985, has £1.7 billion sterling (€2.7 billion) of assets. In the past 15 years it has enjoyed annualised growth of 22.7 per cent - 8.1 percentage points better than the benchmark MSCI Europe ex-UK Index. But the investor market is more competitive. Whereas the league table for Europe ex-UK funds dating back to 1985 comprises just 30, the latest ranking numbers 106 funds.

For the moment, Mr Bolton's value style marks him out from the crowd. The depressed markets may prompt growth managers to rethink their strategy. But he is not expecting a rush of copycats. "I've never experienced a time when everyone is a value investor. Maybe I'd have to change [if that happened]. But it hasn't happened yet."