The European market has long trailed behind its US counterpart and few analysts would bet on a reversal of fortunes.
Even in the past 20 years, which include two US-centric global crises in the shape of the dotcom bubble and the credit crunch, the MSCI AC Europe index’s gains of 169.21 per cent lag well behind the 247.35 per cent return from the S&P 500.
Performance of indices over 20yrs
Source: FE Analytics
Among the reasons given for the long-term outperformance of the US are lighter regulation, lower taxes, weaker union power and a greater entrepreneurial spirit.
However, Columbia Threadneedle’s David Dudding said that European companies have one distinct advantage over their US equivalents – even if it is one that may initially sound like a hindrance.
“The US is such a big home market,” he explained, “but this means one of the problems with US consumer staples companies is that they didn’t have to bother about exporting overseas for so long.
“Whereas Unilever and Nestle, which started off as the Anglo-Swiss company, very quickly discovered that you weren’t going to get very far if you just concentrated on selling chocolate in Switzerland and the UK.
“So European companies are much more tapped into the global economy. You’ve got lots of fantastic global opportunities.”
Dudding (pictured), who manages the Threadneedle European Select fund, said this means that if a business is successful selling its product across Europe, it is likely to be successful on the global stage as well
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For example, his co-manager Ben Moore pointed out global European companies often have experience of spotting a winning product whose popularity is likely to translate beyond its home market – and that can scale up quickly, too.
He used portfolio holding Campari as an example, citing its track record of successful acquisitions.
“In 2003, for a small amount of money it bought a small Venetian drinks company with very few people and very few customers,” he said. “That company was Aperol.
“And because Campari had global distribution already, it was then able to roll Aperol out to different regions.
“That was a great way to reinvest profits and strengthened Campari’s position because that meant it was a stronger business and meant it was able to buy other businesses because of the scale Aperol gave it.
“And amazingly, Italy still accounts for roughly 25 per cent of Aperol consumption, which to us suggests there’s still tremendous growth potential.”
According to Moore, the managers’ ethos can best be described as “get rich slow”, looking for “wonderful businesses that do what wonderful businesses do” – which is reinvest their profits at effective rates of return to help them grow and become even stronger.
Dudding added that it is important these businesses have at least one sustainable competitive advantage, as they like companies with a high return on capital employed and want to make sure this is not eroded.
Moore pointed to the cognac brands owned by holdings Pernod Ricard and LVMH – Martell and Hennessy – as a case in point.
“There are a handful of cognac brands in the world of meaningful size,” he said. “There are 4,000 French farmers in Cognac and no amount of money could bribe them to give you the ‘eau de vie’, they are very loyal to this handful of companies.
“I wouldn’t say no amount of money,” Dudding corrected him.
“No, not no amount of money,” added Moore. “But they are very loyal to these brands. So to enter the cognac market, it’s near impossible.
“The biggest markets for cognac are America and China. And so it’s a business where the competitive advantage is rooted in the heritage of the brands, the stock that they have, and the physical location which happens to be this small plot of land in France, where people think that the grapes make particularly good eau de vie.
“But the European economy is pretty irrelevant to the prospects of the cognac market, what is much more relevant is what happens to the Chinese or the American economy.”
Unsurprisingly, Dudding pays little attention to the ongoing political upheaval in Europe. This is not because he doesn’t have exposure to the continent – his preference for export-led multi-nationals means an economic slowdown in Europe would have less of an impact on his portfolio than one in the US or China, but the manager said it would still cause some damage – but because it is difficult to gain an edge when it comes to macro-economics.
“What really brought it home to me was when Peter Lynch said, ‘if you spend (something like) 10 per cent of your time looking at the macro, that’s 9 per cent of your day wasted’.
“You just can’t control it,” Dudding added. “And even if you get the macro right, you can’t second-guess the market’s reaction. So we don’t spend too much time looking at the macro.
“But I think the other thing is, the fund is 30 years old and apart from a brief period maybe at the end of the 1990s, which was to do with the introduction of the euro, Europe has never been the fastest-growing part of the global economy.
“It’s never been the place to turn to for sort of really high-growth stocks. But that doesn’t mean to say there aren’t loads of good investment opportunities and loads of world-class companies.
“And you risk missing out on those if you focus on the macro picture.”
Data from FE Analytics shows Threadneedle European Select has made 273.66 per cent over the past 10 years, compared with 182.76 per cent from its FTSE World Europe ex UK benchmark and 175.24 per cent from its IA Europe ex UK sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £1.6bn fund has ongoing charges of 0.83 per cent.