With the continent throwing up what has seemed like an endless supply of political upheaval over the past year, Nichols is keen to point out just how little these events matter to his investment decision-making.
He explains: “As a European investor, I’m pretty used to political disruption and dispute. Elections come around in at least one member state in the EU every year, so seeing changing leaders with different objectives is nothing new to us. Sometimes companies will be in the fund for a decade or more and we believe they will not just endure but prosper, regardless of the political climate.”
Nichols is able to look past the macroeconomic environment thanks to the strict focus he shares with co-manager Dave Dudding in identifying world-leading businesses for the fund.
Operating beyond regional, national and even European borders means these companies are less tied to the fate of regulations or political developments in one continental country. But simply developing a global offering doesn’t necessarily pique the managers’ interest. Nichols and Dudding seek out businesses with products or services difficult to replicate by would-be competitors, as well as trying to identify companies who are the sole operator in their space. The advantage the managers see here forms the backbone of the fund and clarifies just how small a part politics plays in the investment process.
Nichols explains: “As global leaders, and sole providers in some cases, these companies tend to set the price for their product or service. They’re not just taking the prevailing market price, and so they’re much less prone to disruption from the likes of trade wars and tariffs. They can move the price of a product to which provenance is crucial, like French cognac, and so in that regard their ability to determine the value of the product to the customer in some ways mitigates some of the macro questions.”
Jameson’s Irish Whiskey, owned by Pernod Ricard - one of the fund’s top holdings, ticks this box for the managers. A dominant global brand with a sustainable competitive advantage capable of delivering consistent growth typifies the first of two key factors Nichols and Dudding take into account when deciding which businesses make it into the fund.
The second turns the managers’ attention to understanding company management and how their interests are aligned to those of shareholders. Nichols explains, “Quite often, what we end up with are owner-operator business models where either you’ve got someone who owns a large large chunk of a company or management teams who are paid to think like owners of the company.”
In the end, the underlying theme of the portfolio is a focus on long-term compound growth. Nichols explains, “We’re looking for businesses that can consistently deliver cash flow year in, year out regardless of the economic backdrop, and reinvest it at more attractive rates of return rather than throwing it away in big acquisitions that never earn a return in the future. We’re not looking for empire builders.”
More on the Threadneedle European Select Fund
Watch Ed Monk's interview with Mark Nichols.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Investors should note that the views expressed may no longer be current and may have already been acted upon. This fund can invest in overseas markets so the value of investments can be affected by changes in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This fund can use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.