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Europe - a stock picker's paradise
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 A very important thing about fund management is frequently overlooked by outsiders, who often believe stock selection is only about picking the winners. In reality this is only half of the battle; avoiding the losers is certainly as important.
Trading conditions in Europe have generally been good this year, resulting in strong earnings growth from companies across a range of industry sectors. But amid the euphoria there have inevitably been some disappointments.
This has been well illustrated in the technology sector recently, where a number of high profile names, such as Nokia and SAP, have announced earnings which fell short of expectations. This was enough to deter some investors from the sector altogether, but by doing so they missed out on some great opportunities.
The technology stocks that I invested in have performed well this year. Profits at Spanish computer services company Indra Sistemas, for example, rose strongly in the first half of 2006 and the company has reiterated its target of growing revenues over the full year by 10%. Second quarter profits at German software supplier software AG, meanwhile, beat analysts' expectations and the company raised its full-year licence growth target.
While trading conditions in many areas of the market should remain favourable, there are some factors that could restrict profitability. The market seems to be getting a bit jittery about rising interest rates and a possible deceleration in the pace of economic growth. These factors have prompted me to increase investment in quality growth companies, whose earnings should be more resilient to any slowdown in economic growth. Companies such as Fresenius Medical Care and Essilor are generating strong earnings and shouldn't be too exposed if the pace of growth tails off.
Against this background, it is likely from now on that the diversity of returns between the winners and the losers in the market will be significant. As a consequence, good stock selection will be more important than ever.
In the past few years investors have been able to make reasonable returns from European equities simply by investing in an index tracker but that is unlikely to be the case going forward.
The valuation differential between genuine growth companies with above-average, sustainable, earnings growth and their inferior peers has eroded to the lowest level in 15 years. This will invariably create some disappointments but also a lot of opportunities in the months ahead - ideal conditions for talented stock pickers.
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