Baring Europe Select, Baillie Gifford European and Neptune European Opportunities are the European funds IBOSS investment director Chris Metcalfe is backing across the firm’s model portfolio range.
Metcalfe, who manages the IBOSS model portfolios, said the equity region has a much better opportunity set when compared to other developed markets such as the US and UK.
Last week, FE Trustnet went under the bonnet of the IBOSS model portfolios and also looked at why the manager is bearish on the US market, as well as the funds he is using in one preferred region – Asia.
“Everything starts on a relative basis to the US for us and we like it for where it is in the cycle,” Metcalfe said.
He noted that Europe was “late to the party” following the global financial crisis of 2008, with the eurozone crisis in 2011 dampening the market and keeping the economy from improving as much as in the US.
Performance of indices over 10yrs
Source: FE Analytics
This has been reflected in the stock market, with the MSCI Europe ex UK index underperforming the S&P 500 index by 128.12 per cent over the last decade.
“Just the whole structure of the European Union and eurozone means things are likely to move slower because you have so many different countries,” Metcalfe said.
He added: “The valuation versus the US looks much more attractive and I think there is also much more opportunity in Europe for active managers because there are so many different countries and companies within those countries.
“There seems to be just a much better opportunity set in Europe even if the backdrop of the markets meant that valuations were at the same level.”
However, they are not, with the US market having been “bid up to the skies” in recent years as investors have placed a premium on growth and bought into the technology story.
“It takes a lot for Americans to invest outside their country and even though they have slightly got on board the European train they are pretty late to the party but I think on a relative basis there is more to go at in Europe,” the manager noted.
This does not mean there are no challenges to the market, with political instability never too far away due to the composition of the eurozone.
This was brought sharply into focus by the UK’s decision to leave the EU last year. However, since then a surge in populist sentiment in key member states like France and the Netherlands, has largely been shrugged off.
“Europe has obviously got through some of the political issues but I don’t think that structure – the EU and eurozone – is ever going to be properly out of the woods just because you have so many different countries,” Metcalfe said.
“In the last week or so it has been Catalonia and we will be moving onto the Italian election next – there is always going to be something.
“There are issues but I think the markets have shown that you need to look through a lot of the geopolitical stuff and the bottom line is the economic data is strong.”
Another concern is the euro, which has been strengthening over the course of the year impacting exporters. But despite a stronger euro, Metcalfe said European stocks are still coming from a relatively low base compared to US stocks and are therefore more attractive.
With this in mind, the first fund the manager owns is the four FE Crown-rated Baring Europe Select run by Nicholas Williams, Colin Riddles and Rosie Simmonds.
The £2.1bn fund is focused on smaller companies with 19.2 per cent in financials, 17.3 per cent in business providers and 15.4 per cent in industrial goods companies.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
“We have been holding the fund for about three years, give or take, and it has been a fantastic performer,” Metcalfe said. Over the last three years the fund has returned 102.09 per cent.
“It continues to do very well and so far so good really and it has been a great acquisition for us.
He added: “The fund is now soft-closed and has been for a little while. We are glad they have soft-closed because when investing in smaller companies fund size is an issue.”
Over the last decade the fund has been a top quartile performer in the IA European Smaller Companies sector returning 212.08 per cent although it has lagged both the benchmark and sector over the past 12 months. It has an ongoing charges figure (OCF) of 0.81 per cent.
The second fund the manager has backed is the £456m Neptune European Opportunities run by FE Alpha Manager Rob Burnett.
“Neptune is very deep value. It tends to be at the absolute top or the absolute bottom and since we have brought it in it has done extremely well,” Metcalfe said.
Over the last year, the fund has been the best performer in the IA Europe ex UK sector, returning 35.93 per cent as the value trade came into fashion during the second half of 2016 and first half of 2017. It has an OCF of 0.87 per cent.
The fund is 36.3 per cent weighted to financials and 26.5 per cent to materials with a growing exposure to auto manufacturers: three areas Burnett discussed with FE Trustnet last month.
The final fund IBOSS has employed across the model portfolios is the five crown-rated Baillie Gifford European fund run by Stephen Paice, Moritz Sitte and Tom Walsh.
The £407m fund looks for high quality, well-managed businesses on low valuations and blends well with the other two funds, Metcalfe said.
He added: “One of the things we like is the team-based approach as we have had issues with other fund houses because we couldn’t actually work out who was managing the money but we get very good access with Baillie Gifford to the managers.
“The other thing we like about Baillie Gifford is they are cost effective. They cut OCFs quite aggressively compared to a lot of people and they weren’t expensive relative to others in the first place.”
The fund, which has an OCF of 0.6 per cent, has been a top quartile performer over one, three, five and 10 years, returning 174.9 per cent over the last decade.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“It is a bit like our Asian equities set up in that we are very much concerned with the overall make-up of the segment and when you look at the European space we have done very well in Europe for a long time,” Metcalfe noted.
“In fact it is probably our best performing sector relative to benchmark since we launched and historically we have held funds that [blend well].”