'Rolls Royce relies on advanced technology and barriers to entry'

Underweight on banking, overweight on industrials and technology. This is in a nutshell the position of Frederic Jeanmaire, manager of Columbia Threadneedle Investments' Ct Pan European Focus fund.

Purely defence-related stocks have performed well this year, leading to a change in valuations. In addition, after the recent relaxation of ESG exclusions, more investors can hold these stocks in their portfolios. However, we believe it is useful to remain selective in this sector, as we are in all others, aware of the evolution of technologies, the impact of rearmament policies and also the pressure from the US to buy US products. We believe, in fact, that good results can be achieved by investing in diversified businesses, i.e. where a solid civil business is combined with an interesting exposure to the defence sector: Rolls and Safran are examples of this, selling aero engines for both civil and military use and with profitable after-sales activities.

Our investment approach is predominantly bottom-up; therefore, we do not apply a geographic or sector filter as an initial element of the selection process. That said, there are some sectors in which we are more likely to see viable business models and others where opportunities are more limited. In general, we tend to avoid Oil & Gas, traditional utilities and basic chemicals, as these are commoditised sectors where companies have little control over price returns or growth. For these reasons, we also consider consumer goods and pharmaceutical companies to be more challenging, while the industrial sector presents itself as a universe rich in robust and competitive business models. In addition, we favour the technology sector, with high exposure to companies involved in the semiconductor production chain; we are convinced that artificial intelligence will require considerable processing capacity.

Avoid sectors with standardised products and excessive competition, as well as companies that do not occupy a profitable position in the value chain. This philosophy leads us to underweight the banking and energy sectors today and, conversely, to overweight the industrial and technology sectors, investing in companies that have dominant positions in specific markets and that have the technology and supply necessary to capitalise on these positions, so as to generate and sustain high returns over the long term.