In times like these, contrariness is not a dirty word

ARE BMW shares good buying at 26 ($A29)? Is PPR, the French conglomerate, reasonable value at 55, given its debt load? Should shares in Alstom, a French train manufacturer, be bought?

Those are the sort of questions that occupy the mind of Toby Harrop, who looks after the European investment fund run by Platinum Asset Management.

He's been looking after European stocks since Kerr Neilson left BT Australia 15 years ago to set up Platinum - and took several colleagues with him, including Harrop.

"At (Melbourne) university, I hadn't been aware that there was an organised systematic way of doing this job," he says.

"Meeting Kerr and seeing a guy who was pretty carefully scouring world stockmarkets, trying to understand industries and businesses and the pricing of securities, was the revelation. That's what got me interested."

Harrop finished up at BT on a Friday after less than 18months with the company and joined Platinum on the Monday.

"It was a tiny firm on a rainy day, with virtually no funds, with one desk to share," he remembers.

Platinum at last count had $13.5 billion under management, spread through various funds including the European fund.

Melbourne Grammar-educated, Harrop, 38, who bought his first shares when he was 12, has about 60stocks in the European fund.

The European fund declined by 25per cent for the March year, compared with a 35 per cent drop by the relevant index, while over 10 years the fund has gained 11 per cent a year compound, compared with a 2per cent fall in the index.

It is a close-knit team and almost all the people who joined Neilson 15 years ago are still there. Neilson's style has been passed on to his disciples and they all follow his contrary thinking model, buying what is out of favour, avoiding "hot" areas of the market and looking for "cold" stocks or industries that have been passed over.

"We tend to be people who are keen to look where others are not, just as a starting point," says Harrop.

"Neglect is the best word to describe what we do, better than contrary, because contrary can be argumentative for the sake of it. Neglect is more 'let's look at something that's been left alone with fresh eyes'."

Platinum's contrary style means that often - and for lengthy periods - it will be out of step with perceived market wisdom, but that doesn't worry Harrop.

"We're so disagreeable as to what is super-hot that's there's no danger of us owning shares with the pack," he says.

"Our danger is more that we'll be too far out in the Siberian wilderness in areas that are good value but are just dull."

During the tech bubble, Platinum bought dull stocks such as brewers, and when the bubble collapsed, the contrary thinkers cleaned up.

Sometimes, Platinum is too early. It was banging on about the dangers of the build-up of debt for years, well before the collapse. It shorted financials too early, but the saving grace was that the firm's wariness kept it mostly away from Western banking stocks.

Platinum screens stocks in an initial attempt to unearth undervalued securities, looks at price-earnings ratios, underlying cash flows, and companies' research spending, but also pays close attention to the people running companies, not to mention trying to get a big-picture view of a company and the industry it is in.

"Are we value investors? Are we bottom-up investors, are we stock-pickers? Sure, but with some pretty serious overlays of what the hell's going on in the world," says Harrop.

"There are some places where people do 20-page models. We like modelling as much as the next guy, but we don't claim to be able to be accurate. We prefer to get the big picture right, to be rather right, rather than being exactly wrong."

How does someone who lives in Australia research European stocks?

"The advantage is that you avoid the chatter. You do not have that distraction, but you also miss out on some of the little nuances and local things that are going on that might be useful. We've tried to make the advantage work, by taking longer-term positions," Harrop says.

Twice a year he and Neilson go to Europe and stay for a couple of weeks. In December, they saw 30 or 40 companies. Language is not a problem. "In Germany, they speak better English than I because they were taught grammar correctly, the French are pretty good and the Scandinavians are flawless. As you go south it gets more difficult. If you go to a small company in Genoa, for example, you're going to struggle."

He reports that access to top executives is not difficult. "We get terrific access, really. One of our advantages is that we're coming from Australia and we're not there every week. I think it impresses them and they think, 'Oh, we'd better make a bit of an effort, these cats have come a long way'.

"We saw Joe Kaeser, the chief financial officer at Siemens recently. He and the chief executive are the ones trying to change this colossus from a whole lot of silos into a functioning machine.

"We were scheduled for a half-hour meeting and an hour and three-quarters later he's still there."

And what of the market now? Will there be a global depression?

"If depression is a 10per cent reduction in GDP, that would seem a pretty likely sort of contraction, given that a lot of countries have probably done half of that already.

"But 25 per cent unemployment and those 1930s-style numbers? No, I think that would be astonishing."

Harrop says it wouldn't surprise him if the market moved lower in the longer term but he says he's not in the business of calling the market.

"We now face the situation where there's overcapacity in lots and lots of industries and you're going to be having soft demand for quite a while until things catch up.

"Profits will be dull, perhaps not going back to the lows of the '70s but surely not reaching recent peaks for some time. So if stocks are priced at a modest 11 or 12 times profits, but profits are dreadful for five years, it's not a great recipe for being in stocks.

"There are suppliers who've seen variations of 4, 5, 6per cent over 20 years who are dealing with a drop in orders of 40 per cent. What they're doing is shutting the factory or idling two-thirds of the production lines and laying off staff.

"It's not that the end demand is down 40 per cent - it's probably down 15 per cent or 20 per cent - but it's the effect of the inventory adjustment through the chain."

But he thinks the market's new-found strength could run a bit longer.

"We think it is fairly likely that this rally will go for a little while.

"A lot of the sentiment indicators reached levels that tend to cause a bear market rally."