Fund managers fret about valuations in wake of ECB rate cut
By David Randall
NEW YORK, June 9 (Reuters) - When the European Central Bank put its economy-boosting stimulus plan into high gear last week, it sent European stock prices to six-year highs. But mutual fund managers who might be expected to like that are instead voicing a new worry: The policy leaves them without enough reasonably priced stocks to buy.
"For those of us that are valuation-conscious, it will be tougher and tougher to find attractive stocks, period. I don't know how else to put it," said Matthew Kaufler, the lead portfolio manager of the $1 billion Federated Clover Value fund .
The ECB said it would charge banks to park funds overnight, effectively creating a negative interest rate in an effort to revive the euro zone economy by nudging banks to lend money to small and medium-sized businesses, rather than hoard it. That should push stock valuations higher worldwide, as investors pull their money out of low-yielding European bonds and send it toward shares ranging from dividend-paying U.S. companies like PepsiCo Inc to European automakers that could see a benefit from Europe's easy money policies, fund managers said.
In Europe, a year-to-date rally of 6 percent has sent the price-to-earnings ratio of the Stoxx Europe 600 to 17.2, on the high end of its historical average. In the United States, meanwhile, the P/E of the benchmark S&P 500 has risen to 18.6, more than a full point higher than the 2007 peak of 17.5 that preceded the 2008 financial crisis, according to Bespoke Investment Group.
Connor Muldoon, a portfolio manager of the $6.2 billion Causeway International Value fund, has been moving more of his portfolio into cyclical European companies such as French automobile maker Peugeot SA in anticipation that low interest rates will spur more sales.
Yet at the same time, he's holding on to more companies in his portfolio as other attractively priced options dry up. The portfolio now holds approximately 65 stocks, a jump of nearly 20 percent from the number of companies the fund held during the 2010 debt crisis.
"We're finding it better to just hold on to the businesses that we know and invested in, even if there is less upside than what we had previously," Muldoon said.
Mark Freeman, chief investment officer of Westwood Holdings Group, who oversees $19 billion in assets, has been increasing his position in companies including Qualcomm Inc and pharmaceutical and medical device maker Covidien PLC in anticipation that negative interest rates in Europe will make dividend-paying U.S. stocks even more expensive. He is eschewing traditional so-called dividend aristocrats - those companies that have raised their payouts annually for 20 or more years - and instead choosing companies that are growing both dividends and revenues, even if their payouts alone are relatively small.
"The most expensive part of the market is pure yield, and this is an attractive alternative to that," he said. (Reporting by David Randall; Editing by Jonathan Oatis)
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