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FUND VIEW-Top European stock fund turns to behavioral finance

David Randall
Tuesday, 12 Nov 2013 | 1:57 PM ET

NEW YORK, Nov 12 (Reuters) - Fund manager Jonathan Ingram doesn't hew to the same rules that other stock pickers follow.

He doesn't build intricate spreadsheets that model company value. Or rely on price targets that tell him when to buy or sell. Or take meetings with company executives - that takes too long and can cloud your thinking, said Ingram, who co-manages (with two others) this year's top European stock fund by trying to profit on the emotional mistakes that other investors make.

So far this year, it's working.

The $765 million JP Morgan Intrepid European Select Fund is at the top of the 103 European stock funds tracked by Morningstar so far in 2013, the first year since 2007 that investors have sent money back to Europe.

Ingram credits his emphasis on "behavioral finance" - the art and science of understanding how human error can get in the way of investing.

Put more bluntly, he tries to anticipate the mistakes that other investors will make and then trades on them.

For example - those meet-and-greet sessions with company honchos? He leaves them for others because "any advantage one can gain by meeting with a company is more than outweighed by the emotional bond and imperfect decision making you create," Ingram said.

Even professional analysts display human foibles when they stick with the pack and discredit new information that runs contrary to what they already believe. That prompts Ingram to look for companies that have not received analysts' upgrades despite good news like a new contract or increasing revenues.

When analyzing a potential new purchase, he seeks three attributes: (1)a growth trigger like a new executive or a macro-economic trend(2) positive momentum - once a stock starts moving up, it usually keeps going in the same direction for a while, the behaviorist in him believes, and (3)signs that a company's management is not overconfident - often telegraphed when a firm buys back shares instead of expanding aggressively, or uses conservative accounting practices. These criteria led him to make big bets on companies in the British Isles this year.

All in all, it's a fast-moving strategy - Ingram said he may buy and sell a stock within a week.

The Intrepid Fund has a portfolio turnover rate of nearly 300 percent, well above the average rate of 92 percent among European funds, according to Standard & Poor's. That could bestow higher-than-usual taxable gains on investors who own the fund outside of tax-advantaged retirement funds and should give them pause, said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

"Somebody who is buying this and thinks it's a great core position should know this is not a buy-and-hold long-term approach."

The fund will hold anything from a behemoth like French oil and gas company Total SA to a small-cap such as English engineering firm Babcock International.

The Intrepid Fund returned 28.7 percent through Nov. 8, in a category with an average return of 18.7 percent. Over the last three years, the fund has returned an annualized 11.7 percent a year, above the industry average of 8.2 percent and putting it in the top 10 percent of its peers. For those returns, investors pay an annual fee of $1.25 per $100 invested, a level that Morningstar considers above average.

BET ON THE BRITISH ISLES

Lately Ingram has concentrated more of his assets into companies headquartered in the United Kingdom and Ireland that can take advantage of Europe's slowly improving economy. Overall, approximately 42 percent of his assets are invested in the British Isles, more than double the average of 19.7 percent among his peers.

His bets are scattered across cyclical industries. He began buying real estate firms, including English homebuilder Countrywide PLC after the British government launched a subsidy program that gives new home buyers attractive mortgage rates and lower down payments. Real estate prices have since jumped by their fastest rate in 11 years. Shares of Countrywide, which has a market value of $1.9 billion, are up 34 percent for the year to date.

"We don't see an end in sight in UK housing," Ingram said.

He's also been buying shares of Smurfit Kappa Group PLC , an Ireland-based company that manufactures paper and packaging material, as a way to benefit from the improving economy throughout the euro zone.

"This is very much a European play rather than a domestic one," he said.

Shares of Smurfit Kappa, which has a market value of $5.4 billion, are up 97 percent for the year and trade at a forward price-to-earnings ratio of 14.7, which is slightly below its peer average of 15.8, according to Thomson Reuters data.

Ingram also owns International Consolidated Airlines Group SA, the parent company of British Airways. The share price is already up 103 percent for the year to date, yet Ingram still likes it.

"We are seeing a return to the business travel market, and they are very much a beneficiary of that," he said.

He also looks to behavioral clues for signs that it is time to sell a company.

"People don't enjoy giving bad news, so we tend to give bad news in small chunks," Ingram said.

That means a downgrade, or a company lowering its estimates for expected earnings, is an Ingram "sell" sign: There's probably more bad news to follow.

(Reporting by David Randall; Editing by Linda Stern and Jan Paschal)

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