Stamina, resilience, a good team behind you and a clear strategy for the long road head – these are qualities we are all familiar with thanks to a current renaissance in cycling. The same marks of endurance have helped put another pursuit back on the map: the hunt for European equities.
The key competitors in this arena have dug deep since the foothills of the global financial crash and have had to negotiate further obstacles such as the sovereign debt crisis and the rise of populism and Brexit.
So, who has had the vision and conviction to power on through and which managers are fund selectors betting on to move into the slipstream when it comes to outperformance? Here top fund buyers reveal who they are backing.
Fredrik Wilander, DNB (Norway)
We are overweight European equities as a house due to strong fundamentals both on the earnings and macro side. Other plus points include the ECB’s pledge to continue stimulative monetary policy and the relative valuations of the region compared to other global equity markets.
We have added one European equity strategy to our portfolios over the past year, the Wellington Strategic European Equity fund, managed by Dirk Enderlein and Gerrit Mader. This was a good fit with a particular internal stakeholder’s request, which was for a reasonably well-diversified but still very actively-managed strategy.
We like the fund managers’ clear investment philosophy and their broad source of ideas. Enderlein and his team offer a good balance of diversification and conviction. They follow a fundamentally-driven, stock-picking approach with a particular focus on long-term growth trends and the competitive landscape affecting companies.
Hervé Croset, WSP (Switzerland)
Since autumn last year, we have gradually increased our bias toward European equity value funds because of improving economic conditions and signs that central banks may start to disengage from QE.
We currently favour active funds with concentrated portfolios and a deep value tilt and prefer managers with a cyclical bias which helps to avoid overvalued defensive stocks.
During the first half of the year this approach drew us towards financials, industrials and energy where there was an asymmetric opportunity to the upside, and valuations were near record lows. On the flipside we underweighted consumer staples and healthcare sectors.
We have balanced our bias toward value investing risks by exposure to smaller companies. The European equity market is full of small and mid-cap companies with high growth prospects, which still trade at reasonable valuations, and there are plenty of active fund managers to capture that growth.
We favour the lowest band of the market cap spectrum where inefficiencies are greater and less attention from analysts means better hunting for stock pickers. For European value funds, we like the ABN AMRO Multi- Manager Funds - Pzena European Equities strategy for its disciplined deep value approach, and its proprietary price-to-normalised earnings tool for valuation screenings.
For small caps, we favour the Mandarine Europe Microcap fund, which has a very diversified portfolio of more than 160 stocks to counter the risk of this volatile asset class. Its investment universe is also less dependent on macro developments.
Andrea Ciaccio, AZ (Hong Kong)
Europe is at an interesting macroeconomic juncture. Economic growth is accelerating as the credit cycle has picked up strongly.
Money is flowing back to the continent from the US, where it sought refuge after the ECB started its QE programme in 2015; there it helped fuel the stock market rally, generating large profits that European investors have now started to repatriate.
In credit markets, yields on pan-European investment grade bonds and high yield bonds have collapsed to an all-time low of around 0.7% and 3% respectively with a 5.5- year and a 3.5-year duration.
In short, the economic cycle has reached its mature phase, a condition that normally favours late cyclicals and value. However, the euro has risen almost 12% against the US dollar since April, and subsequently EPS growth has started to flatten in the region.
Government bond yields have traded sideways during that period, but this has taken place in the upper part of the range initiated in 2016. Worse still, they may be reaching a breaking point and could climb higher in the final quarter of the year as already robust growth continues to strengthen and the ECB winds down part of its QE programme.
A sudden and sharp repricing of the European curve would most likely push global bond yields higher, potentially creating a broad risk-off environment. For this reason, we are holding a balanced European portfolio of low-quality debt and inflation-sensitive value stocks, as we expect interest rates to rise, combined with a selection of growth stocks whose performance is less dependent on the domestic economy.
We therefore favour managers with a specific focus in terms of style and/ or market cap and we have a limited allocation to core strategies. Our line-up of funds shares a single, common trait: fundamental, bottom-up stock picking. In that context, our biggest position over the course of 2017 has been the IVI European fund.
These comments originally appered in a supplement published with the September edition of Citywire Selector magazine.