A shift to a value approach away from quality growth in Europe has meant Quilter Cheviot model portfolio service (MPS) lead manager Simon Doherty has shuffled his fund exposure in the region. 
In an under the bonnet look at Quilter Cheviot’s managed portfolio service (MPS) yesterday, FE Trustnet noted that Doherty is bullish on the prospects for Europe but has shifted his approach to reflect a more positive outlook on the economy.
It is an area that we have looked at very closely with recent political events that have been taking place and we like what we’re seeing in Europe – we’re still quite positive on the region,” the manager said.
The region has been a popular choice for investors this year, rising 14.2 per cent YTD, as the below chart shows.
Performance of index YTD
Source: FE Analytics
He pointed to positive economic data, with GDP growth coming through in the region, as well as an improving political situation and investor inflows as reasons for his optimism on Europe.
Meanwhile corporate earnings growth, which has been something the region has lacked for some time, appears to be on the rise.
“What we see is a gradual tailwind to the region in terms of earnings coming through and some renewed confidence in terms of asset flows as well,” he said.
As such, below FE Trustnet looks at the portfolio changes Doherty made in the latest rebalance to reflect this improving environment in Europe.
“The biggest changes we made at the fund selection level were in Europe and it was to make a change to reflect our positive outlook on that region,” the manager said.
“At the manager level we made a switch and took out our longstanding position in the BlackRock Continental European Income fund across the core strategies.”
The BlackRock fund has been a mainstay of the model portfolios but Doherty said he has moved away from the fund in an effort to take a more value-focused approach to the region.
“They are quite unashamedly focusing on the quality names of the European market and we have wanted to increase some of the cyclicality within our underlying exposures there within the region,” he noted.
The £1.6bn, five crown-rated fund, run by Andreas Zoellinger and Alice Gaskell, has a quality growth bias with the likes of Nestle, Unilever and British American Tobacco among its top 10 holdings.
It has been a top quartile performer in the IA UK Europe ex UK sector over the last five years but has underperformed the sector and FTSE Developed Europe ex UK benchmark over the last year.
The fund has a yield of 3.92 per cent and a clean ongoing charges figure (OCF) of 0.93 per cent.
Doherty said: “We have a very high regard for the team and the process and because of that income focus we have actually retained the managers within our global income strategy – so we have no issues at all with them and it is still one of our high conviction ideas.”
Having removed the BlackRock fund as part of the rebalance, Doherty has, however, stuck by FE Alpha Manager Paul Wild and his JOHCM Continental Europe fund.
The £1.9bn fund has also been a top quartile performer over five years, but has underperformed over the last year, as the below chart shows.
Performance of funds vs sector and benchmark over 5yrs
Source: FE Analytics
The fund is overweight telecoms and healthcare, with pharma giants Roche and Bayer, household goods producer Unilever, French media firm Vivendi and oil & gas company Total making up its top five holdings.
The portfolio, which is 84.7 per cent weighted to large caps and 6.5 per cent to mid-cap stocks, is currently made up of 59 holdings with 6.8 per cent held in cash.
“[Wild] is a fairly pragmatic manager who is quite happy to rotate in terms of sectors and styles,” Doherty said.
However, Doherty said he had reduced the overall percentage exposure to the JO Hambro fund slightly, bringing in the Henderson European Selected Opportunities fund, managed by John Bennett, as the second holding within the regional allocation.
“By holding those two managers what we are doing is upping that cyclical exposure slightly – specifically in certain areas such as banks,” he added.
Indeed, the £2.3bn fund has a 28.4 per cent exposure to financials with 19.9 per cent in consumer goods and 12.9 per cent in industrials.
The four crown-rated fund has been a top quartile performer over the last decade, returning 115.19 per cent, and has beaten its average peer over five years.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Doherty noted: “I would stress we talked about to what extent we wanted to move from a slightly cautious and quality- focused positioning with Alice and Andreas in the mix to a more value-orientated, cyclical exposure.
“And there were a number of candidates that we were looking at across the portfolios but we felt that John Bennett was another pragmatic manager.”
“He is not prone to swing the portfolio hugely unless he sees a prevailing theme that he wants to capture.”
This can be seen in the fund’s healthcare exposure, which has been as high as 30 per cent over the past few years, but has been reduced down to 14.5 per cent.
“He had a longstanding healthcare exposure for a number of years but he has moved that down quite substantially this year and allocated to European banks.
“He has done that in a pragmatic style by allocating to quite a number of holdings within that sector to capture the overall positive trends that he is seeing rather than a handful of individual stocks-specific recovery names or stories that he is trying to identify.”
“So putting JO Hambro and Henderson together from a read-through analysis and style perspective we felt captured our positive outlook of the region in a better fashion.”
Henderson European Selected Opportunities has a yield of 1.4 per cent and an OCF of 0.85 per cent while JOHCM Continental Europe has an OCF of 0.81 per cent.