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(Bloomberg) -- Money manager Andrew Neville barely blinks when asked to pick his portfolio’s crown jewel.
Sunny Optical Technology Group Co. has returned about 7,000 percent to his team at Allianz Global Investors. They’ll soon have to part with the shares, which they’ve owned since 2010, because the Chinese lens maker with a $17 billion market capitalization has far outgrown their small-cap focus, he says.
The next big winner in his view? Deutsche Pfandbriefbank AG, the German property and public-sector lender that was once part of the failed Hypo Real Estate Holding AG, bailed out in 2008. He’s betting it will benefit from increasing demand for credit just as European bank stocks begin to shed the gloom that depressed valuations in the aftermath of the financial crisis.
A U.K. legal dispute hanging over Deutsche Pfandbriefbank’s stock isn’t a deterrent, he says.
“Some people won’t touch it because it’s got binary uncertainty,’’ said Neville, who runs Allianz GI’s $2.1 billion global small-cap funds from London. “We think that it’s more than in the price. Other people won’t look at it because it’s a small bank not in their country.”
Listed in 2015, Deutsche Pfandbriefbank, known as PBB, is involved in a spat regarding losses on one of its U.K. transactions. Investors are wary of a negative outcome, which Neville says is reflected in its valuation: PBB’s shares trade at just 0.6 times book value, compared with the 2.1 average for the MDAX Index of medium-sized companies.
The shares, up 18 percent since the July 2015 initial public offering, have climbed almost 40 percent this year.
A widespread dislike for European banking shares is starting to fade amid the prospect of higher interest rates and as financial crisis legacies get resolved. Unloved for most of the past decade, banks still rank among the region’s cheapest stocks and have lagged a recovery by U.S. rivals.
Neville, who has been managing money since 1997, says he’s turned bullish on lenders for the first time in his career. “Everything is in place - why would you not be overweight banks?” he said.
The money manager is also keen on “digital derivatives,” stocks he defines as second and third-tier beneficiaries of the rise of e-commerce. Examples include Air Transport Services Group Inc., an aircraft-leasing company that counts Amazon.com Inc. as a customer, and companies involved in warehouse automation, such as Jungheinrich AG and Interroll Holding AG.
“They don’t sell you the stuff, you don’t see them online, but they make the infrastructure work,” Neville said. Each of the three stocks has climbed at least 25 percent this year.
Allianz GI’s main small-cap fund has returned some 18 percent in 2017, beating the 10 percent average gain for its peer group, according to data compiled by Bloomberg.
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