How Europe can be a dynamic place to invest

This European fund has beaten the S&P 500 over 1, 3 and 5 years despite European markets lagging behind the US.

| 5 min read

The breakaway of twelve football clubs to create a ‘European Super League’ was roundly criticised this week. The initiative crumbled within days, but there’s one continental ‘Super League’ more of us can get behind: world class European companies.

Despite Europe’s problems such as obtaining vaccines, delayed economic reopening and political disagreement, many of its ‘star’ companies have marched on regardless. They continue to offer investors important exposure to leading brands and innovators in their fields, whether it’s luxury cars (Ferrari), semiconductors (ASML), fashionable trainers (Adidas), leading drugs makers (Roche, Novartis, Novo Nordisk) or (probably) the best lager in the world… All examples of why a US S&P 500 tracker can’t cover all bases when it comes to global growth.

One option in the sector - BlackRock European Dynamic

One fund that has taken full advantage of the wide range of opportunities available is BlackRock European Dynamic. It has enjoyed a strong year, outperforming the average fund in the sector by a considerable margin, as well as outpacing the S&P 500. As I write, it has beaten the US market over 1, 3 and 5 years, quite a feat given the dominance of large tech companies in the American market, which have delivered outstanding returns.

The fund has a concentrated approach that attempts to capture opportunities across a wide range of European companies. The manager is focused on finding those trading on reasonable valuations relative to history, but which also have genuinely growing earnings. Although it should be expected to be predominantly invested in larger companies it may also venture down the size spectrum given the right opportunity.

Recent activity

Due to the resilience in business models of the companies the fund owns it dipped less than the market as the Covid-19 crisis hit last year. Yet it was also able to keep up with the rising market through the summer and beyond by tilting towards potentially mispriced ‘recovery’ names as expectations grew. This included buying Arcelor Mittal and a selection of six banks including SocGen and Unicredit.

Meaningful positive contribution also came from THG, a UK business which came to market via an IPO and which the team gained meaningful allocation to due to an existing relationship with the management team through having held shares privately. The company taps into growing end markets such as beauty, wellness and nutrition, whilst offering a vertically integrated e-commerce platform with attractive margins.

One of the top holdings in the fund, LVMH, recently became Europe’s largest listed company by market capitalisation, displacing Nestle. However, the owner of multiple luxury brands including Christian Dior, Givenchy, Bulgari and Tiffany & Co has experienced a particularly volatile share price over the past year as the outlook for the luxury goods proved hard to gauge. However, more recently investors have been drawn to the sector anticipating robust performance over 2021 and beyond.

Table: Discrete annual performance of BlackRock European Dynamic, peer group sector and benchmark

Managerial change

In October 2020, BlackRock announced that Alister Hibbert would step down from running the fund and that his co-manager Giles Rothbarth will be taking over. Rothbarth officially assumed sole responsibility in January 2021, having worked alongside Hibbert since 2015 and been named as co-manager since 2019.

While it is disappointing to see Alister Hibbert step aside, he leaves behind a very capable and highly resourced team and we feel comfortable the fund will continue to be managed in the same focused and pragmatic way. We expect it to remain stylistically flexible, concentrated and with the same ability to exploit opportunities across the market cap spectrum. The team continue to operate a research-intensive process. This aims to uncover companies which can create value for shareholders by understanding the resilience of business models through the economic cycle and then identify change that could drive future earnings and cashflow.

Top ten holdings

  • ASML (Semiconductors, Netherlands) 6.7%
  • LVMH (Luxury goods, France) 5.8%
  • DSV Panalpina (Transport, Denmark) 5.1%
  • Sika (Chemicals, Switzerland) 4.2%
  • Lonza (Chemicals, Switzerland) 4.0%
  • Teleperformance (Support services, France) 3.6%
  • Safran (Aerospace, France) 3.5%
  • ST Microelectronics (Semiconductors, Switzerland) 3.1%
  • Hexagon (Precision technology, Sweden) 3.0%
  • THG (E-commerce, UK) 2.9%

(source: BlackRock as at March 31st 2021)

Our view

As the name suggests, the portfolio is dynamically managed and this is reflected in the higher-than-average turnover of the portfolio. The fund’s style is also dynamic, in that it can flex between ‘growth’ and ‘value’ to a degree, though given the significant size it is concentrated in larger companies.

Holdings are nonetheless usually a bit more expensive than the average (when assessed against metrics such as the price-to earnings ratio) but offer attractive growth prospects that the manager believes more than compensates for the higher entry cost. Despite its flexibility, a marked rotation into economically sensitive value stocks will likely be a headwind in relative terms.

Given the fund’s characteristics, performance should be expected to deviate significantly from the market, and that of a ‘passive’ of tracker fund. However, we believe it remains one of the best ways of accessing European markets for investors targeting capital growth and willing to hold for the long term.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

How Europe can be a dynamic place to invest

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