Europe is currently 7IM’s highest overweight equity position, with the group using a broad range of styles from across the market cap spectrum to gain exposure to the continent.
Damian Barry, senior investment manager at 7IM, said: “The European economy is performing well, earnings look likely to move ahead after years in the doldrums, and at a time when valuations look stretched in many markets, European profitability and returns still have a lot of upside and are well behind levels enjoyed in the 1990s and the noughties.”
Barry said that while a patient approach to Europe is still very much warranted – he pointed out equities on the continent often bear the brunt of bad sentiment – there has been a string of positive news recently.
For example, Greece, Spain, Italy and Ireland are showing strong signs of recovery, while Portugal’s bonds jumped earlier this week when the country’s debt was upgraded.
“The prospect of labour reform in France could also pique investors’ interest in the long-term prospects for the continent,” Barry added.
Below, 7IM highlights the four funds it is using to gain exposure to the European growth story.
CF Miton European Opportunities
Carlos Moreno, manager of the mid cap-focused CF Miton European Opportunities fund, bases his stock selection process around four key pillars: a long-term horizon; an unconstrained approach with regards to a benchmark; a high return on capital, with evidence this will be sustained in the long term and not competed away; and superior growth prospects, meaning businesses with high and ideally accelerating sales growth.
In the latest edition of Trustnet Magazine, Tony Lawrence named this as the most recent addition to 7IM’s multi-manager range. He said funds that invest further down the market cap spectrum “away from the stocks most vulnerable to the whims of passive flows” typically reward investors with a smoother ride and a better return.
Data from FE Analytics shows that CF Miton European Opportunities has made 58.32 per cent since opening for business in December 2015, compared with gains of 41.2 per cent from the IA Europe ex UK sector.
Performance of fund vs sector since launch
Source: FE Analytics
The £135.1m fund has ongoing charges of 0.66 per cent.
Old Mutual Europe (Ex UK) Smaller Companies
Next on the list is the Old Mutual Europe (Ex UK) Smaller Companies fund, run by Ian Ormiston.
Ormiston uses price targets, catalysts and investment checklists to find substantially undervalued companies. He aims to hold approximately 50 equally weighted stocks in the fund.
The manager is keen to point out that the fund invests in companies, not countries or Europe as a single market, and that political and economic noise barely registers at the smaller company level, leaving the team free to invest on the basis of company fundamentals.
In a note to investors, Ormiston said he has recently found interesting opportunities in industrial and growth companies, meaning the portfolio remains balanced between its usual styles of growth, value and quality.
“Although it is not of central importance to our investment process, we will keep an eye on sentiment and the effects of politics upon it,” he added.
Data from FE Analytics shows that Old Mutual Europe (Ex UK) Smaller Companies has made 86.17 per cent since launch in November 2014, compared with gains of 72.57 per cent from its Euromoney Smaller Europe (Ex UK) benchmark and 70.47 per cent from its IA European Smaller Companies sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £298.2m fund has ongoing charges of 1.26 per cent.
Oyster Continental European Selection
FE Alpha Manager Michael Clements, who runs the Oyster Continental European Selection fund, pays close attention to stocks whose share price has recently taken a hit to see if they have been unfairly treated and therefore offer value to long-term investors.
A good example of a stock-pick that highlights his selection process is Banca Sistema. The recent Italian banking crisis saw share prices plummet across the sector and while Clements felt the banks themselves represented too much of a risk, this allowed him to pick up Banca Sistema on the cheap, purely because it had the word “bank” in its name.
Banca Sistema describes itself as Italy’s leading “receivables factoring” business, which is a specialist area of debt collection. It has a reliable business model that aims to profit from “Italian inefficiency”, as Clements explained in more detail in a recent Trustnet article.
Data from FE Analytics shows Clements has made 211.21 per cent since he started running money in June 2009, compared with gains of 134.12 per cent from his peer group composite.
Performance of manager vs peers over career
Source: FE Analytics
The £118.6m Oyster Continental European Selection fund has a total expense ratio of 1.27 per cent.
7IM European (ex UK) Equity Value
Barry said 7IM felt that there was a dearth of value opportunities left in Europe, so it built its own – the 7IM European (ex UK) Equity Value fund.
“Many of the funds in Europe are growth funds, which has been the right place to be,” Barry explained.
“But as and when the style cycle turns, there are not many funds available to take advantage of the rotation.”
7IM European (ex UK) Equity Value uses a smart beta strategy, identifying profitable and growing companies which are assessed as trading at a discount to their intrinsic value – for example those with a high cash-flow to price, high book-to-price or similar metric.
The use of the smart beta strategy helps it to keep costs to a minimum – it has ongoing charges of just 0.35 per cent.
7IM European (ex UK) Equity Value has made 23.13 per cent since launch in April 2015, compared with gains of 28.85 per cent from the IA Europe ex UK sector and 25.12 per cent from the MSCI Europe ex UK index – as Barry noted, however, the fund’s style has been out of favour over this time.