Important information: 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.
We’re going to hear a lot about it coming home this month. As the Euros football tournament plays out across screens up and down the country, we thought it was time to turn our attention to an oft overlooked part of the stock market: Europe.
For UK investors, European stocks fall into something of an uncomfortable middle ground. They offer few of the sort of technology-driven growth giants that have dragged US and Chinese markets to new heights and lack the familiarity of our own domestic value-biased laggards.
None of that means you should ignore the region. There are myriad opportunities here, many of which go overlooked by the wider market
And it’s not just the football that’s got us thinking about Europe. As of the end of May, European shares have been the best performers among major markets since the start of the year. A low starting platform - Europe’s shares have been out of favour since the sovereign debt crisis - could combine with a post-pandemic recovery to offer investors a new trove of opportunities.
Our Select 50 choice of favourite investments features five funds focusing on Europe. Here’s an overview of each.
Barings Europe Select Trust
The Barings Europe Select Trust invests in small to medium sized businesses across Europe. The fund’s manager, Nick Williams, believes that the marketplace for small European stocks is not yet fully understood and goes under many analysts’ radars, meaning that there are some significant mispricing opportunities to be exploited here.
Williams is very much a bottom-up investor. He wants to understand individual businesses on a fundamental level to seek out any mismatches between price and value. He’s ably supported by a wider management team consisting of Colin Riddles, Rosemary Simmons and William Cuss.
Investors should note that while smaller companies typically offer greater opportunities for growth than larger ones, they also can be riskier. They also tend to be more domestically focused than larger, more internationally-focused stocks, which means they can be more vulnerable to periods of economic instability.
That said, the management team focuses on uncovering companies of high quality. They’re looking for companies with above average profitability (primarily determined by Return on Equity) and defensive, low variability business models. The portfolio is also well diversified across sectors and countries within the region. Currently with 98 holdings, there’s little concentration risk here.
For investors looking to smaller caps as a route into Europe’s domestic trends, this fund could be one to consider. It would also work well alongside a larger-cap focused fund to gain well-diversified exposure to the region.
BlackRock Continental Europe
The BlackRock Continental European Fund is a defensively minded fund. That means it looks to invest in businesses that can grow regardless of the wider economic environment, meaning it has the ability to hold up well when the economy stalls.
For managers Stefan Gries and Giles Rothbarth, a good mark of the defensive qualities they’re looking for is predictability. They’re looking for companies that offer reliable earnings and cash-flow trajectories. Businesses with clearly defined strategies, competent management teams and strong levels of cash generation that can be reinvested into future growth are all attractive.
Top holdings in ASML, a Dutch multinational that designs chips used across the world in semiconductors, and LVMH, a French conglomerate which owns luxury goods brands including Louis Vuitton, Moet Hennessy and Christian Dior, demonstrate that thinking. Both companies are world-leaders in their respective fields. Their dominance keeps the competition at arm’s length and offers the kind of reliable growth the managers are looking for.
This is a fund focused on the long-term, and investors should have similar time horizons in mind before they invest. The fund may lag when cyclical sectors, such as energy and financials, outperform or when the market rebounds, while a relatively concentrated portfolio (around 30-60 stocks) and low sector exposure means it can differ significantly from the European benchmark. Those are some risks - the upsides are that this fund could offer a relatively steady ride and meaningful growth opportunities along the way.
Comgest Growth Europe Ex-UK
The Comgest Growth Europe Ex-UK Fund is all about seeking out quality European growth. Portfolio manager Alex Wittet likes companies with high barriers to entry, strong returns, and sustainable growth prospects.
Wittet feels Comgest’s unique “partnership structure”, whereby the managers are all shareholders in Comgest, allows his team to not worry about short term noise but to keep a focus on the long-term prospects of the companies he invests in.
This long-term approach is at the heart of everything Wittet and his team do. The fund has only ever held 140 different companies since the launch of Comgest’s pan-European strategy 30 years ago. That means that the managers take high-conviction positions in a concentrated portfolio of stocks. They currently hold 37 companies, with the top 10 positions accounting for 43% of the total portfolio. Investors should note that a concentrated portfolio like this may be riskier than one diversified over more holdings.
Of those 37, the focus is very growth orientated. The fund has never held a single bank, commodities, utilities or oil & gas company - typical “cyclical”, value sectors which Wittet avoids. Growth-focused sectors like technology and healthcare feature heavily, making up 25.4% and 31.8% of the portfolio respectively.
Like many growth-orientated investments, this fund may lag during periods of economic rebound, but could outperform when markets are weak. The fund could suit investors with a long-term time horizon looking for exposure to Europe’s growth story.
JOCHM European Select Values
JOHCM European Select Values looks mainly for value in Europe’s small and mid-cap companies. For portfolio manager Robbie Woulters and his deputy Luis Fananas, that means holding a combination of ‘great companies at average prices’ and ‘average companies at great prices’. The former consists of highly profitable companies with consistent and transparent earnings growth, the latter lower quality businesses possibly facing near term headwinds but hopefully able to offer an attractive upside in the longer term.
In many ways, it’s a typical value fund. The combination of ‘quality value’ and ‘deep value’ above is a tried and tested approach.
However, Woulters likes businesses with healthy free cash flows - that is, the cash left to distribute to investors after the firm has paid its expenses and invested in its physical infrastructure.
Focusing entirely on free cash flow yield rather than traditional valuation measures means the portfolio doesn’t tend to have many positions in financials or energy stocks - highly unusual for a value strategy. That can make this fund hard to define - its return profile tends to be idiosyncratic rather than being tied to certain economic conditions. The fund will typically enjoy periods where value stocks outperform but can occasionally suffer from higher volatility coming from the unloved nature of the companies it holds.
Nevertheless, the contrarian attitude of the management team coupled with their impressive levels of stock analysis have helped the fund to a strong level of past performance. For investors looking for a different approach to European equities, and who are willing to tolerate bouts of price volatility, this fund makes for an interesting choice.
Fidelity Funds - European Growth
Matt Siddle, portfolio manager of the Fidelity Funds - European Growth Fund, invests in some of the biggest names on the continent. Siddle is particularly interested in firms able to generate high cash flow returns on investment, with strong balance sheets and steady earnings growth.
This quality growth bias draws the manager to certain sectors over others. Consumer staples, health care and information technology make up much of the portfolio. Conversely, it is underweight materials and utilities.
Though a traditionally value-orientated sector, Siddle’s exposure to financials demonstrates his valuation discipline - here the manager currently prefers insurance stocks, like top ten holdings Legal & General and Prudential, over banks due to their record-low valuations despite fundamentals holding up and improving pricing.
Recent uncertainty has allowed the Fidelity manager to add to some of the fund’s largest holdings, including Dove soap-owner Unilever, the fund’s fourth largest holding and a staple of many quality-minded fund managers.
Unlike some of the others on this list, this fund’s quality growth focus and decent levels of diversification across sectors mean it’s a good offering for core exposure to Europe - i.e. something that follows the market as a whole. It may not shoot the lights out in rapidly rising markets, but it should provide investors with a good defensive cushion and offer meaningful levels of growth over the long term.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. 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. Overseas investments will be affected by movements in currency exchange rates. The Fidelity Funds - European Growth Fund uses currency hedging to substantially reduce the effect of currency exchange rate fluctuations on undesired currency exposures. There can be no assurance that the currency hedging employed will be successful. Hedging also has the effect of limiting the potential for currency gains to be made. The BlackRock Continental European Fund and Comgest Growth Europe Ex-UK Fund invest in a relatively small number of companies so may carry more risk than funds that are more diversified. The BlackRock Continental European Fund, Barings Europe Select Trust and Fidelity Funds - European Growth Fund uses financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The Barings Europe Select Trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. 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 a Fidelity adviser or an authorised financial adviser of your choice.
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