Avoiding defence stocks – one of 2025’s best-performing sectors so far – has not stopped the EdenTree European Equity fund from jumping to the top of the performance tables.
EdenTree European Equity is in the top quartile of the IA Europe Excluding UK sector over one, three, five and 10 years, as well as shorter timeframes, despite lacking exposure to a number of areas deemed unethical, including defence.
Chris Hiorns, lead manager of the fund, said a similar pattern emerged after the recovery from Covid, when fossil fuels and energy stocks dominated performance charts.
“That was one of the sectors driving returns back then and, like today, it was one of the periods where the fund performed best against the market, despite not owning it,” he explained.
The £200m strategy, which applies both negative and positive responsible investment screens, has returned 21.4% over the past 12 months versus 14.6% from its sector. Over five years, its 85% return is significantly ahead of the sector’s 54.3%.
Hiorns said the performance challenge of avoiding restricted sectors is often overstated. “Just not being able to invest in certain areas doesn’t necessarily impede you for performing very strongly over a given period,” he said.
The EdenTree approach excludes companies that derive more than 10% of revenues from areas such as alcohol, gambling, tobacco, fossil fuel production and conventional weapons, as well as any involvement in activities such as animal testing for non-medical purposes or the manufacture of controversial weapons. All holdings must pass both internal screening and external oversight by a responsible investment advisory panel.
But exclusions alone don’t explain the performance. What sets the fund apart, the manager argued, is its discipline in sticking to value-led fundamentals.
“You shouldn’t just get caught up in that momentum,” he said. “You should continue to follow your own beliefs in terms of your investment philosophy.”
This approach has led the team to avoid crowd favourites such as pharma company Novo Nordisk and chip maker ASML, despite their popularity among European equity managers.
Instead, Hiorns has often leaned into positions that go against the grain. A notable example came in the aftermath of the Covid crisis, when the fund – previously underweight banks for more than a decade – made a significant move into the sector.
“For the first time, we moved overweight because we felt that these were the companies that were going to perform well coming out of Covid,” he said. “They’ve massively derisked, they’ve massively de-levered. When the economy has moved a bit weaker, we haven’t seen that come through in provisions.”
That call paid off and the position has been partially reduced over the last couple of months. “We remain overweight but a lot less than we were,” the manager said, seeing “less upside and potentially more downside as well”.
More recently, Hiorns has begun to rotate into cyclical areas of the market that have sold off, including companies whose earnings were hit in the second quarter.
“We did suspect that second-quarter results were probably going to be a lot weaker than in the first quarter because of tariffs,” he said.
Names added to have included telecom company Nokia, French minerals producer Imerys and French advertising company Publicis, as well as Finnish chemical group Kemira.
“From a medium- to long-term point of view, these companies are very attractively valued and can perform very well going forward, so feel confident increasing our exposure.”
Although EdenTree’s investment style sets clear parameters around what can and cannot be held, Hiorns maintains that the fund’s success stems from a consistent valuation discipline and a willingness to deviate from consensus positioning. “There are always opportunities in companies trading at relatively low valuations [that] generate you good returns over the long term,” he said.
That mindset is unlikely to change, regardless of short-term market narratives. “Being willing to take contrarian positions compared to the rest of the market, and therefore being able to access companies on very attractive valuations, has enabled us to perform well over the long term. And we continue to think that will be the case in the future,” he concluded.