Europe went from the best-performing major market in 2025, when the EuroStoxx returned 32.2% in sterling terms, to the worst so far this year, with its 9.8% gain lagging every other major index.
Investors have responded accordingly: in the first half of 2026 there were net outflows worth £3.8bn from the largest funds in the IA Europe Excluding UK sector, with some of the best-known European trackers and active strategies among the hardest hit.
Fidelity’s Caroline Shaw hasn't followed the crowd out of the region altogether. Rather than reducing exposure, she has spent recent weeks reshaping what her European allocation is made up of, tilting it toward specific segments.
Performance of indices over YTD
Source: FE Analytics
Shaw co-manages Fidelity’s multi-asset funds as well as the WealthBuilder managed portfolio service (MPS), which was launched in April. The latter is run through the multi-asset funds used across the firm’s open-ended range, so changes made to the firm's multi-asset strategies are implemented in the MPS on the same day.
“We've been taking our time to get to market. We believe that our philosophy, which is capital growth, capital preservation and then outcomes come as a result of that, fits an MPS really well.”
Because of its integration with the multi-asset portfolios, the MPS isn't rebalanced quarterly, with its allocation reflecting the changes in the manager's view as they happen instead.
“Europe is quite an interesting one. My views are evolving because inflation seems to be a particular challenge there,” Shaw said.
“There is a structural issue on gas energy prices coming into the winter, so there are some concerns there, and rate rises are going to impact parts of the European complex.” Markets are pricing in a 25-basis point hike from the European Central Bank today.
Shaw has been “mindful” of the fact that returns from European equities have “not been disastrous” when compared with the US, but said the region “has been challenged” in terms of broad market results.
“But earnings growth is coming back, so there are some green shoots,” she said. “We're not heavily banging the drum for Europe, but we are certainly more positive than we were a couple of months ago”.
Three pockets of interest stood out to her. The first of the three areas Shaw pointed to was banks, which have delivered strong earnings growth.
Second, defence spending is developing, particularly in Germany, with fiscal spend that is “valid” and traceable in the data: “We can follow the money in defence,” she said, pointing to improving PMIs in industrials and a corresponding pickup in new orders.
The third case was for electrical equipment and grid infrastructure. Here, Shaw gained exposure through underlying holdings that give access to companies like Siemens and Schneider Electric, part of a broader grid-related trade.
Europe's grid, Shaw said, is “not robust enough, not new enough. It's very old in Europe, over 40 years old in places.” That ageing infrastructure now needs rebuilding for renewables integration, resilience against climate change, and, increasingly, capacity for data centres, linking an old-economy trade to the same AI capital expenditure cycle driving markets elsewhere.
“We held the Fidelity Index fund and a Vanguard ETF [exchange-traded fund], but all of those are much broader. We really wanted to narrow down and so we rotated a bit out of those and into the iShares tracker,” she said.
Using the WealthBuilder Active Model 4 as a reference, the team rotated 0.50% from the Fidelity Index Europe and 0.12% from Vanguard Developed Europe – selling out of them completely – and added a total of 0.62% to iShares Core Euro Stoxx 50.
“It's not a ‘give up’ on the rest of Europe. It's just a tilt of our European exposure towards those segments where we think there's going to be better structural growth.”
Elsewhere in the portfolio, Shaw added 1.8% to Redwheel's recently launched Global Intrinsic Value fund, an OEIC version of an existing SICAV strategy.
She backed the fund at launch, pointing to the team's long track record and its high active share relative to the benchmark.
“They are looking for discounted companies, basically companies that they think are at a point of change in the cycle,” she said.
The fund features alongside a 90 basis-point position in both Invesco MSCI World and Fidelity Index World, as well as larger holdings in three other strategies: BlackRock Global Unconstrained (2.16%), which she described as “basically structural growth”, the Fidelity Global Dividend fund (3.24%), a lower-beta, dividend-focused holding she uses for defensiveness, and the Janus Henderson Global Technology Leaders fund (3%), which she uses to access AI-related earnings growth without concentrating in today's largest names.
Shaw also sold the entire US mid-cap equity exposure across her portfolios (2.83% in the WealthBuilder Active Model 4), citing concerns that mid-cap companies, which tend to refinance at the shorter end of the yield curve, were becoming too exposed to rising short-term rates.
In emerging markets, the manager has acted to reduce concentration risk. The MSCI Emerging Markets index is now dominated by China, Taiwan and South Korea, largely through TSMC, Samsung and SK Hynix.
To reduce reliance on those names, Shaw blended active exposure to India through the Ashoka WhiteOak fund (1.05%), and China (1.05%), through First State Stewart Investors, with passive exposure to Latin America (iShares MSCI EM LATAM, 1.05%).
Federated Hermes, Ashmore and Lazard make up the rest of the emerging markets allocation. The result is a slight tilt toward value and quality, and a modest underweight to Taiwan and South Korea relative to benchmark.
Outside of equities, Shaw pivoted 10% of her global aggregate bond exposure into shorter-duration bonds in response to rising yields and has also been rebuilding a position in gold.
Having taken profits and reduced exposure from around 6% earlier in the year, she has started adding back incrementally, taking the position to around 4%.
“At the moment gold looks interesting again,” she said. The current total allocations for the WealthBuilder Active Model 4 are 63% equities, 27% fixed income and 10% alternatives.