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- Norway Wealth Fund Should Be Able to Invest More in Stocks: DN

- Swiss Give France UBS Client Info in Tax Case: SonntagsZeitung

- EU said to be preparing to reject France 2015 budget - financial press 

Keep an eye on :

- AF FP : Air France May Revise Strike Cost to as Much as EU400M: Reuters

- AREVA FP :Said to be likely to decide to scale back investments in order to avoid a credit rating downgrade

- EDF FP : France Energy Min: To consider the cost of maintaining older reactors in decision related to investment in new nuclear power

- G IM : Generali Could Appoint Trichet to Replace Scaroni: Corriere

- GET FP : Antin, Ardian May Bid for Eurostar Stake, Sunday Times Reports

- ROG VX : Roche to Spend CHF1b on Herzog & de Meuron Basel Offices: SZ

- ROG VX : Genentech sales staff banned from visiting 1.9k hospitals in the US

- SIE GY : Exec: expects profitability at its gas-turbine operations to shrink

- TTK GY : Haniel Supporting Takkt Growth Plans, CFO Tells Boersen-Zeitung

- TSCO LN : Tesco Pledges to Sell Aircraft Fleet as It Gets New $50m Jet: FT

In an exclusive interview, Pimco’s former boss explains his new role at Janus, and why he thinks interest rates will stay low.

Come Monday morning, Bill Gross’ business card will read Portfolio Manager, not Chairman, Chief Executive, President, or boss of anything. For one of the most powerful investors on the planet, the abrupt transformation might be a letdown, but it is in some ways a relief. More important, it could be an unusual opportunity.

Unless you’ve been living on a distant planet, you’ve heard by now that Gross, known on Wall Street as the Bond King, bolted on Sept. 26 from Pacific Investment Management, the Newport Beach, Calif.–based investment firm he co-founded 43 years ago, ran in what some former colleagues allege was a tyrannical fashion, and built into a $2 trillion colossus that dominates the world of fixed-income investing. His new home, Denver’s Janus Capital Group (ticker: JNS), serendipitously named for the Roman god of beginnings and transitions, manages just $178 billion.

Gross’ new fund, Janus Global Unconstrained Bond (JUCTX), is a mere skiff, with $12.9 million in assets as of Aug. 31, alongside Pimco Total Return (PTTAX), the $202 billion mega-yacht he captained for 27 years, beating the market handsomely in most of them before hitting the shoals in the past few years. Yet the relatively small size of his new vehicle—it will be larger, possibly much larger, by week’s end—could pose an advantage for Gross, just as the “Unconstrained” of its name could liberate him to go almost anywhere in search of returns.

A member of the Barron’s Roundtable, Gross, 70, shared his expectations for his new job, and his current investment views, in an interview last week. Whether the Bond King can maintain his crown remains to be seen. That he remains one of the most educated, engaged, and insightful students of markets is beyond doubt.

Barron’s: You have been at this game for more than 40 years, Bill. You have plenty of pocket change, and most people think the bond market, to use a term you’ll understand as a yoga practitioner, is about to assume a Downward Dog pose. Why not simply retire instead of starting anew at Janus?

Gross: Managing money is in my blood. I like to get up at 5:30 in the morning and make money for clients and compete against other money managers. That’s something that doesn’t go away. I am obsessed with delivering value to investors and winning the game from a personal standpoint. Retiring at this point in my career just doesn’t suit me.

But is it the right time to launch a new bond fund? The Federal Reserve is winding down its asset-buying program and is expected to raise interest rates next year.

I will be managing an unconstrained bond fund—the Janus Global Unconstrained Bond fund, open to U.S. investors, and an offshore version for non-U.S. investors. Because of its unconstrained nature, it will typically have less duration, maturity, and interest-rate risk than a traditional fixed-income portfolio. Most intermediate-term bond funds are benchmarked to an index of bonds with an average maturity of five to seven years. Unconstrained funds have no such benchmark.

The unconstrained universe, in general, wants a 4% or 5% return with little interest-rate risk. A fund like this seeks to earn a positive return regardless of prevailing market conditions. Although fixed income will constitute at least 80% of the portfolio, this opens up a lot of choices. You can take credit, volatility, liquidity or duration risk. This is probably the best time to manage an unconstrained fund.

Janus Unconstrained Bond was launched in May, and had less than $13 million as of the end of August, about 60% of it parked in cash. Call it coincidence, but this fund looks like it was created for you.

It wasn’t set up for me, although I considered it important to have a vehicle to manage. [A Janus spokesman says the fund wasn’t launched with Gross in mind.]

What can you do at Janus that you couldn’t at Pimco?

Janus is a much smaller shop. Obviously, there will be fewer executive and people responsibilities, so I’ll be able to devote more time to managing money, as opposed to managing an organization. I’ll still be intense; I figured out long ago that I can’t change that. But the intensity and decibel level drop a bit in a smaller place. Also, common sense suggests that it will be easier to implement ideas in a $100 million portfolio than in a fund with more than $200 billion.

Did Pimco Total Return finally grow too big to manage effectively?

I don’t want to get into that. Total Return had advantages and disadvantages because of its size. All I can say is: It will be easier to establish positions without the press noticing on a daily or monthly basis. The bond paparazzi will be less interested in Janus than they were in Total Return.

But they probably won’t be less interested in Bill Gross. You used derivatives liberally in Total Return to boost returns and enhance liquidity. Will derivatives play an important role in the new fund?

The Total Return fund used financial features, such as credit-default swaps, to the advantage of clients. The new funds will use some derivatives, but not a lot.

Will Janus create exchange-traded funds to mirror your funds?

It takes a while to develop and register an ETF, but it is on Janus’ plate. One reason I went with Janus is to be able to offer something the small investor can access easily and at low cost. An ETF allows for that, as will the unconstrained fund. We plan to put together a menu of offerings that serve the small investor and the institutional investor.

You worked with a first-rate team of analysts and managers at Pimco. Are you expecting to build a big team at Janus?

There is a team in place already. That is another reason I thought Janus was perfect for me. Also, I have had a 20-year association with Dick Weil [Janus CEO Richard Weil], who worked at Pimco for 15 years and served as chief operating officer. His wife was my executive assistant for a few years. I went to Denver last Friday [Sept. 26] to visit with Janus for the first time. The firm has a well-established credit-research and bond-management team that has done really well. In fact, they outperformed the Total Return fund for the past few years.

Won’t you be lonesome in an office in Newport Beach?

There are a few people in the office now [administrative and technology personnel]. I expect to have an assistant portfolio manager and a trader, and constant video connections with the Denver team. Another plus is that I’ll be associated again with Myron Scholes, Janus’ chief investment strategist. Myron [a Nobel Prize-winning economist] gave us the idea in the early 1980s to use financial futures. He was on the Pimco board for a time. Along with Myron, I’ll be part of the team that is focused on global asset allocation, so, no, I won’t be isolated here in Newport Beach.

Will you have any management role at Janus, other than running the funds and advising on global asset allocation?

I don’t expect to have any role in setting the company’s direction. I had enough of that at Pimco. People management and business planning are all up to Dick and his team. I was always an investment guy, and the other stuff—hiring, paying people, planning, and so on—became a problem for me. I am uniquely exuberant about clearing all that stuff off my dish.

Switching to the markets, stocks are getting crushed. The Dow Jones industrials have fallen 1.6% from last month’s record high. Is this the beginning of a much steeper selloff?

It is a well-deserved rest. Stocks have gone up for the past five years. In the U.S., much will depend on whether the economy grows by 3%, 2%, or 1%. A growth rate of 3% isn’t a slam-dunk, especially when the rest of the world is at zero or less. I am expecting a 2% growth rate. The domestic economy functions rather independently, but the U.S. isn’t an island. It is connected to places that are struggling, such as China and Europe.

Why has the global economic recovery been so lackluster since the recession?

There are several reasons. The world is still highly levered. Growth in the U.S. and elsewhere has been facilitated in the past 30 years by the expansion of credit and leverage. Once capitalists recognize that they can’t continue to accumulate leverage at the same pace, growth slows. Demographics also are contributing to diminished economic growth. The boomers aren’t booming. They are getting older and retiring.

Not you! You’re starting a new job Monday.

Most boomers need health care, but they don’t need another house or a third car. The aging of our society is putting curbs on economic growth. Thirdly, technology is a boon and a wonder, but it also has eliminated jobs that aren’t being replaced at the same pace. Apple [AAPL] is a wonderful company, but it doesn’t hire as many people as the old General Motors [GM].

Finally, globalization is an issue. The U.S. has been the world leader in globalization since the end of World War II. We have benefited from mercantilistic expansion, and because the dollar has been the reserve currency. Now things are turning sour elsewhere. When you fly into head winds, you fly at a different speed.

Many investors think the bond market is about to hit major head winds after a 30-year rally. Do you?

A three-year German bund trades at negative six basis points [hundredths of a percentage point]. If that’s not a head wind, I don’t know what is. Interest rates are low around the world. That doesn’t mean yields can’t fall and bonds can’t rise when people worry about something going amiss, whether it’s slowing growth in China or the spread of the Ebola virus. Bonds are protection against inflation and disaster. But my low-growth outlook suggests that bonds will earn their coupon.

The Fed has said that the appropriate interest rate long-term to keep the economy in balance is 3.75% to 4%. I say it’s 2%. If the Fed follows through by raising the federal funds rate to 4% in the next few years, there will be bear markets for all assets.

Why is your outlook so at odds with the Fed’s?

There is no model for what happened after the collapse of Lehman Brothers, other than the U.S. in the 1930s and maybe Japan’s asset-bubble collapse. From a commonsensical perspective, it doesn’t make sense in a highly levered world to return to the old normal of a 4% federal funds rate. Some academics argue that it makes sense to keep interest rates lower than normal to heal a levered economy.

My 2% is just a round number, and as much of a stab at an answer as the Fed’s 4%. What I’m really saying is that interest rates have to be kept lower for longer than central banks expect because of the structural head winds we’re facing. It doesn’t mean that Gross and Janus are smarter than the Fed, but Fed Chair Janet Yellen and the Fed staff are model-driven, and they don’t know how to model the structural changes we have discussed. There are things a model can’t accommodate.

The Fed is planning to end its quantitative-easing, or asset-buying program, this month. Might geopolitical crises or a severe stock-market selloff give Yellen cover to launch QE4?

The political blowback would be enormous, and the Fed is worried about maintaining its independence, especially with an election coming up. It’s enjoying the [rate-cutting] handoff to the European Central Bank, and before that, to the Bank of Japan. Absent a catastrophe, which I don’t sense, another round of QE isn’t coming.

Where do you see the best opportunities in fixed income today?

Most of the opportunity, which has developed in recent weeks, is offshore. There is significant opportunity in Mexico, which has half the debt level of the U.S., and interest rates in the 6% range. Mexico is attached to the U.S. in terms of trade, so it is a pretty safe emerging market. This is an opportunity I would try to take advantage of in the unconstrained fund.

I expect the fund to have a decent percentage of short-term high-yield paper on Monday—10% to 25%—that yields 3% to 4%. Both Janus and I like one-to-three-year high-yield paper issued by companies such as Ally Financial [ALLY] and HCA Holdings [HCA]. Currencies are another possibility. As the euro and yen fall, there is an opportunity to take advantage of the relative strength of the dollar. Mild short positions in the euro and yen could be attractive.

What looks dangerous in bond land?

Longer-dated corporate bonds could be problematic. Verizon Communications [VZ] and Apple have been the biggest issuers in the past 12 months. Investment-grade corporates in the five-, 10-, and especially 30-year space are vulnerable, not from a default standpoint but from a liquidity standpoint. If investors look to raise cash because they are worried about world events or slower growth in the U.S., there could be a rush to the exits in this small theater.

Any final thoughts, Bill?

I don’t intend to downscale in intensity, but Janus is the right spot at the right time for me. I appreciate Dick’s putting this together so quickly, in a matter of 24 to 48 hours at most, and I don’t intend to disappoint.

Thank you.

Asahi under pressure to step up acquisitions

Asahi, Japan’s biggest brewer, is under pressure to step up acquisitions in an effort to double its overseas business and challenge the dominance of the world’s largest beer producers.

Naoki Izumiya, chief executive of the beverage and food conglomerate best known for its Asahi Super Dry beer, told the Financial Times in an interview that size mattered when it comes to global competition.

“The top four companies [Anheuser-Busch InBev, SABMiller, Heineken and Carlsberg] hold about 50 per cent of the total sales and 80 per cent of the world’s operating profits,” he said. “The size of our group right now, is it big enough to survive? We need to grow our business to a certain size. We need to make efforts to that end, first and foremost.”

Though Asahi is Japan’s biggest brewer in terms of sales and the fifth-largest in the world, its overseas growth has fallen short of its own expectations.

It has also come under pressure from rival drinks group, Suntory, which joined the big spirits shots in January after its $16bn takeover of US bourbon maker Beam Inc, producer of Jim Beam whiskey.

Mr Izumiya ruled out similar large acquisitions for Asahi, saying he preferred to consolidate domestically and ride growth in Asia with M&A that could attract the interest of the multinational brewers. The group has a 20 per cent stake in China’s Tsingtao brewer.

“By having bigger business in Asia, in the ASEAN, we will be able to compete with the global players, maybe to negotiate some strategic alliance,” he said. “You can go like Suntory if you buy the big brand with a lot of borrowing. Our strategy may take more time but then we will be able to grow as the market grows.”

Asahi’s overseas business has doubled over the past two years to Y192bn in 2013 – 11 per cent of total sales – thanks to M&A. But this is well short of the three-year 20-30 per cent target it set itself.

Japan’s three biggest brewers have spent more than $30bn since 2006 on foreign acquisitions, but they have yet to reap fully the benefits of the costly purchases.

Kirin, the country’s second largest brewer, has taken a break from overseas acquisitions to focus on strengthening those operations. Its 2011 purchase of Schincariol, Brazil’s second-largest beer group, has been disappointing with sales in Brazil falling by a third last year.

The size of Asahi’s overseas losses doubled between 2011-2013 to an operating loss of Yen4.6bn, due to goodwill writedowns. And the group is bogged down in an acrimonious dispute with New Zealand’s Independent Liquor, the beverages group for which it paid NZ$1.5bn in 2012.

Mr Izumiya also cited a dearth of Japanese mangers with international experience and English-language skills as the main barrier to external growth.

“We always have to ask local people to take over, but when the business goes south, unless we have [our own] good people, this may not be immediately grasped by us. And, if I could speak in English fluently without the interpreter, that would be fine – I think in the future we need that.”

ome hedge fund managers are taking salaries, private-jet expenses and entertainment costs directly out of the funds they manage, according to investors and consultants.

Hedge funds notoriously charge high upfront fees, with the “2 and 20” model of a 2 per cent annual management fee and 20 per cent performance fee the historic norm.

Despite this, some are charging their costs and expenses to the funds they manage, eroding investors’ returns still further.

“We have seen some very bad examples, such as hedge funds paying salaries from the funds and private jets put through the fund expenses,” said Ed Francis, head of investment for Europe, the Middle East and Africa at Towers Watson, a consultant. He described these charges as “pernicious”.

“This is certainly very true of some of the larger established funds. They would put salaries and expenses through and that was pretty normal,” said a former fund of hedge funds manager, who declined to be named. The manager estimated the cost of such charges as around 30 basis points a year.

Phillip Chapple, executive director of KB Associates, an operational consultancy, said other hedge funds were charging marketing expenses, data fees and the costs of Bloomberg terminals and research directly to funds.

“I think a lot of managers see this as a way of eating up expenses that they incur as a fund manager,” he said. “It is very hard to look people in the eye and justify some of that stuff. If you find them doing this, then you wonder what else they are doing.”

The charges are legal if they are outlined in a fund’s offering memorandum or private placement memorandum. However, these documents are “typically written in a way to encompass most things imaginable”, according to Joshua Barlow, associate director at Paamco, a fund of hedge fund manager.

Many charges, such as those for audit fees, legal fees, administration costs and tax filings, are widely seen as legitimate.

Mr Barlow said he had seen “surprising” levies for “employee salaries, technology, regulatory filings, fund portfolio and accounting systems, outsourced middle office, insurance, trade errors, travel and entertainment” that, in some cases, are “so large that they raise the question ‘what is the management fee I am paying going towards?’”

“We have seen instances where they can be quite large,” said Stephen Oxley, managing director of Paamco. “They might say they need to use an executive jet to visit a company, but that doesn’t cut any ice for us. We have it in our sub-advisory agreements that we are not going to pay. We are not going to invest unless this is sorted out.”

Mr Francis said the most egregious abuses were being weeded out amid a greater focus on operational due diligence, as institutional investors increasingly replace wealthy individuals as the primary hedge fund investors.

Some allocators to hedge funds said they were willing to invest in the worst offenders if their performance was sufficiently good, while others admitted they did not have the resources to check exactly what they were being charged for.

“The onus is on the investor to understand what they are invested in [but] it is slightly hidden in the documentation. We had to go digging for it,” said the former fund manager.

Jack Inglis, chief executive of the Alternative Investment Management Association, said: “Managers disclose all fees and expenses that are directly or indirectly borne by investors.”

“We expect that the professional nature of hedge fund investors allows them to fully assess the appropriateness and the level of such fees prior to and during the life of their investments.”

- Report noting this "could put France's budget in 'serious noncompliance' with the new EU rules, likely leading the commission to send it back to Paris for revisions."

- EU official: "What people underestimate is that what's at stake is the entire credibility of the rules."

--> The Bottom Line

Micron’s earnings per share are growing at a double-digit rate, but shares, at $33.94, trade at just nine times earnings–well below peers. At 12 times, they would be worth $50 in a year.

Makers of DRAM have been winnowed to three players. Market forces could push Micron Technology stock higher.

Computer memory is in fierce demand, and prices are riding high. That puts memory makers in an excellent position, which, using the upside-down logic that investors have learned to apply to the group, should be cause for concern. Plump profits have historically tempted manufacturers to overproduce, leading to bloated inventories, tumbling prices, and the next bust for shares.

In a report this past week, tech forecaster Gartner said that dynamic random access memory, or DRAM, the main working memory for computers, should generate 26.3% revenue growth this year, for an all-time high of $44.1 billion. That helps explain how shares of DRAM specialist Micron Technology (ticker: MU) have multiplied from $6 to $34 in just two years. But in the same report, Gartner warned that 2016 will bring—marvel at the precision—a 25.5% revenue plunge. And that explains why Micron stock, despite its run-up, is pessimistically priced at nine times projected earnings for the next four quarters, substantially below its peer group and a 40% discount to the Standard & Poor’s 500 index.

Investors should buy the shares. There are reasons to doubt the good-news-is-bad-news investment logic this time around. Chief among them, the number of key DRAM makers has collapsed from more than 20 in the 1990s to three today. That has created more discipline on supply. So has the rising difficulty of shrinking memory chips. Meanwhile, DRAM demand, which has benefited of late from surprisingly strong orders to refresh workplace computers, should get long-term support from the growing computational needs of smartphones and data-crunching applications. None of this will bring an end to memory cyclicality, but it should provide steadier cash flows, leading to less-fearful stock valuations. Over the next year, that could send Micron shares up nearly 50%.

Based in Boise, Idaho, Micron has an estimated 25% to 30% DRAM market share, tied for No. 2 with SK Hynix (000660.Korea), behind leader Samsung Electronics (005930.Korea). It also has a 10% to 15% share of the market for flash memory, or NAND, used for data storage with speedy access. That market has five suppliers, with Micron and SK Hynix vying for fourth behind Samsung, Toshiba (6502.Japan), and SanDisk (SNDK).

In the industry shakeout that has occurred since the 1990s, Micron survived early on not by staying ahead on technology but by staying a step behind. While Japanese rivals spent fiercely at the cutting edge, Micron “bootstrapped its way up,” using slightly older machines to produce slightly lower-spec chips, with a focus on profits, according to Rick Whittington, who covers the stock for Drexel Hamilton. Now Micron has become one of the cutting-edge players, thanks in part to a joint venture with Intel (INTC) on NAND and the purchase last year of Japan’s Elpida, a mobile DRAM specialist, out of bankruptcy.

In its fiscal year ended on Aug. 28, Micron reported profit of $3.05 billion on revenue of $16.36 billion, up 156% and 80%, respectively, from the year before. Including a raft of one-time items partly related to acquisitions, profit jumped to $3.74 billion from just $247 million. Adjusted earnings per share were $3.23, up from 24 cents. DRAM fetched about two-thirds of revenue and NAND, most of the rest. Wall Street expects EPS to climb at double-digit paces in Micron’s newly started fiscal year and the next one, hitting $3.68 and then $4.09.

PERSONAL COMPUTERS STILL drive 40% to 50% of DRAM memory demand, and with Microsoft (MSFT) discontinuing support for its Windows XP operating system earlier this year, companies have been forced to upgrade, prompting new machine purchases. In July, Intel cited enterprise PC purchases as a leading contributor to a 40% profit jump. Investors have found plenty of reasons to contain their optimism.

Apple’s (AAPL) new iPhone 6 uses the same single gigabyte of DRAM as previous models, a disappointment to those who expected more. Analysts say Apple’s memory stinginess is a reflection of tight industry conditions and its efficient operating system. But other smartphone makers, including Samsung, continue to add memory.

One lasting change is rising demand for big-data applications, which companies can use to turn information into selling opportunities. Those require vast amounts of memory to generate real-time results as customers make transactions. In a recent note to investors, Credit Suisse called big data the most important incremental driver of its bullish view on memory, and one that investors are missing with their focus on supply. It sees Micron as significantly undervalued, trading at an enterprise value (stock market value plus debt, minus cash) of just 1.3 times the replacement value of its manufacturing assets, versus more than two times for rivals.

NAND memory, meanwhile, is expected to continue gradually replacing mechanical hard drives due to its faster access speeds and lower power consumption. While supply there isn’t as tight as for DRAM, memory makers are running up against the laws of physics in trying to cram more storage into smaller spaces, forcing new, expensive approaches, like 3-D transistor architectures that build up rather than just out. Micron’s partnership with Intel gives it access not only to leading chip designs but also to new alloys, and Intel is motivated by its view of chip rival Samsung as a bigger threat, says Drexel’s Whittington. That partnership alone over the next few years could be worth $10 a share on top of the stock’s current price, he estimates.

Beyond technology, Micron’s Durcan views service as a key competitive advantage. “We’re a global company with deep customer relationships, whereas many of our competitors are more nationally focused,” he says. “That’s important in a world where you’re trying to not only deliver something but also help customers integrate it into their systems.”

ALL TOLD, RISING memory demand should continue to meet restrained supply in coming years, and to the extent manufacturers are tempted to relax their discipline on supply, new, more difficult chip advances should keep them in check. That should result in rising cash flow for the group. Jefferies & Co. predicts free cash flow for Micron will swell to $3.4 billion this fiscal year from $2.6 billion last year, for a free cash yield of more than 9% at the stock’s current price.

A rise in the stock price to $50 over the next year would put Micron at 12 times forward earnings estimates, still a 20% discount to the broad semiconductor group, which includes processor and equipment makers. It’s a valuation that acknowledges memory’s continued exposure to swings in the economy, but also recognizes that the group’s wildest swings in profitability are likely behind it.

Faith in austerity is falling as geopolitical tensions are rising. That bodes well for the region’s neglected defense stocks.

European governments are losing faith in austerity just as geopolitical tensions are rising, factors that bode well for the region’s neglected defense stocks. Investors have largely steered clear of defense companies on fears that spending cuts would constrain earnings. Figures compiled by the International Peace Research Institute, or Sipri, show that worldwide military expenditures fell 1.9% in 2013 and 0.4% the year before.

That decline was driven mainly by the U.S., the world’s biggest defense client, which cut spending 7.8% last year. Strip out the U.S. and spending would have risen 1.8%, boosted by countries such as China, Russia, and Saudi Arabia. Sipri attributes the U.S. decline to the end of the Iraq war, the start of the Afghanistan drawdown, and effects of congressional budget cuts in 2011. Defense spending also fell more than 2% in Western and Central Europe last year.

Now there are signs that the declines are reversing. Despite cuts, spending still amounted to a whopping $1.75 trillion in 2013. The U.S. has been drawn back into conflicts such as attempts to contain the Islamic State. And there are concerns about renewed terrorist activity.

Even Germany, which spends about 1.3% of its economic output on defense, compared with 4.4% in the U.S. and 1.9% in France, according to the North Atlantic Treaty Organization, may have to open its wallet. A German parliamentary report leaked last week gave a shocking view of its military, in which only a handful of helicopters and armored vehicles are operational.

Meanwhile, austerity critics are gaining ground. France’s ruling Socialist Party presented its 2015 budget this week outlining cuts that fell short of those promised by President François Hollande when he took office over two years ago. Finance Minister Michel Sapin said France would “refuse austerity.”

Tim Gregory, head of global equities at London’s Psigma Investment Management, says he hasn’t owned defense stocks for several years. “From an investment perspective, because of budget constraints and the impact of austerity on spending, investors have steered clear of the sector.”

As a result, many defense stocks have underperformed the European equities market and would react to even a slight uptick in spending. Although not ready to buy back into defense, Gregory says one prospect is Ultra Electronics (ticker: ULE.UK), a United Kingdom aerospace and defense business. “It has very high-quality management and manages its capital well. It’s about 50% defense but also has cybersecurity, which is a good area to be in right now. Around two-thirds of its defense activity is in naval, tactical sonar systems,” he says.

BESI Research analyst Edward Stacey this week upgraded the stock to Buy from Neutral. He gives the share a prospective fair value of 20.50 British pounds ($33.12), with upside potential of 19%. The stock closed on Friday at €17.51.

Spanish defense and transport company Indra Sistemas (IDR.Spain) could benefit from Madrid’s 2015 draft budget, which kept defense outlays steady. Kepler Cheuvreux’s Natalia Bobo says, “In 2013, the defense budget was down by 2.3%; thus, at least, we are seeing some stabilization.” She has Indra as a Hold with a 12 euro ($15.20) target price. The stock closed on Friday at €10.83.

Cover story: Highlights two fund managers at Fidelity with two separate approaches. 1 who chooses stocks he feels will double earnings in 5 years, the other who chooses stocks under $35/shr that look undervalued with strong cash flow. Discusses the environment for passive vs active investing and the potential for the pendulum to swing back to active investing as interest rates normalize and correlations among stocks start to break down.