The chance of a decade for a hedge fund manager

The stock market’s near-historic gulf between the priciest and cheapest stocks creates the opportunity of a decade for investors, according to a portfolio manager at the Julius Baer Group Ltd.-controlled Kairos Investment Management Ltd.

Even as this year’s rally added $9 trillion to the value of global equities, outflows have continued, preventing pockets of the market from erasing December’s sell-off and expanding a gap in valuations between some stocks.

Coupled with above-average earnings growth, these segments of inexpensive shares are a gold mine for investors seeking another five years of strong returns, says Federico Riggio, whose 310 million-euro ($351 million) Kairos Pegasus Fund S.A. hedge fund lists Porsche Automobil Holding SE and Volkswagen AG among its top long-term holdings.

In addition to Porsche and Volkswagen, Kairos Pegasus Fund’s top long stock holdings in February included a Greek property investment company Grivalia Properties REIC. Porsche trades at 4 times estimated earnings, about half of the sector’s average valuation, and Volkswagen at 5 times.

Kairos Pegasus Fund invests in stocks with a long-short, event-driven and medium-volatility strategy, with a focus on European and some global value shares. The fund returned about 10 percent in the first two months of this year, according to its February factsheet, outpacing the HFRX Equity Hedge Index’s gain of 4.7 percent in the same period.

Since its 2014 inception, the fund is up 155 percent versus the index’s drop of 4.1 percent, but on a 12-month view it has lost 6.9 percent, which Riggio blames on the underperformance of value stocks: the MSCI Europe Value Index last year posted its worst drop since the 2008 financial crisis.

Charts: Used with permission of Bloomberg Finance L.P.