European Equity Fund

Risk Considerations

The Fund is actively managed and invests mainly in a diversified portfolio of shares of European companies.
Investment in the Fund involves risks, including general investment risk, equity market risk, risks associated with depositary receipts, exclusion criteria risk, geographic concentration risk and Eurozone risk, risk associated with the changes resulting from the United Kingdom’s exit from the EU, small and mid-capitalisation shares risk and currency risk which may result in loss of a part or the entire amount of your investment.
The Fund may use derivatives for hedging and efficient portfolio management and is subject to derivatives risk. Exposure to derivatives may lead to a risk of significant loss by the Fund.
The value of the Fund can be volatile and could go down substantially.
Investors should not invest in the Fund solely based on this website.

Investment involves risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Overview

Manager's Outlook

The investment environment continues to be marked by a high degree of geopolitical and economic uncertainty. The range of potential outcomes for consumer and industrial confidence and expenditure, inflation and central bank actions is still wide.

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At such times we believe it is even more important to remain focused on fundamental company research where we feel we can have an edge. While an awareness of the macroeconomic and political environment is necessary, Our goal is to construct a portfolio that prospers over the medium term whatever transpires.

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European equity valuations pulled back sharply this year, but still are not what one would describe as "cheap". Recent developments are likely to put pressure on costs, supply chains and demand, weighing on corporate earnings across most sectors this year.

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Central banks appear determined to tighten monetary and fiscal policy in Europe and elsewhere, signaling that the fight to bring down inflation takes priority over economic growth. This is a less supportive backdrop for equities, probably for the rest of this year, but the pressure to tighten policy as sharply may lessen should economies stall?and there are signs that this may already be happening.

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The multiple dramatic events of the last few years have been a trigger for transformations across many industry structures. For example, we are witnessing profound changes in the fields of sustainability and biologics. This is a dynamic that we consciously look to exploit, and we are focused on identifying those companies that will be material beneficiaries of these forces. Genuine insights here will be valuable as the market is wrestling with a lot of uncertainty as to how individual companies are positioned.

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In these uncertain times, we must be prepared for market dislocations triggered by events. The market rotation and volatility are presenting us with an increasing number of new opportunities. We also seek to defend those holdings that have recently been derated but where the business remains fundamentally robust and may even be stronger after recent events. If we do enter a slower economic environment, then the investment attractions of companies that do have a more sustainable growth outlook should become stronger.

Strategy

Fund Summary

Actively managed and invests mainly in a diversified portfolio of shares of European companies.

Performance - Net of Fees

Past performance is not a reliable indicator of future performance.

30-Nov-2023 - Tobias Mueller, Portfolio Manager,

European shares surged in November, snapping three consecutive months of losses, as slowing inflation raised expectations that central banks may soon start cutting interest rates. The MSCI Europe Index posted its biggest monthly gain since January, with the rate-sensitive real estate, information technology and industrials sectors recording double-digit increases. Growth stocks beat value stocks, which is a more favourable style backdrop for us. Within the portfolio, health care, consumer discretionary and industrials and business services were the top-performing sectors due to our selection of stocks. In health care, our holding in a bioprocessing company with leading market positions performed well after it said order intake had started to improve at the end of the third quarter. On other hand, energy and real estate were the main, albeit modest underperformers. Our choice of securities and underweight allocation dragged on the former, while our lack of exposure to real estate weighed on performance as well. In energy, our holding in an oil and gas exploration and production company dragged as the price of oil weakened.

30-Nov-2023 - Tobias Mueller, Portfolio Manager,

In this more inflationary environment, we aim to hold companies that exhibit pricing power or that are outright inflation beneficiaries at reasonable multiples. We also maintain a modest defensive tilt due to the uncertain environment. We raised our overweight position in information technology after adjusting some of our positions. We added a global leader in packing and assembly equipment that turns processed wafers into finished microchips, and we exited a German semiconductor company in which we have less conviction. However, we moved further underweight in consumer discretionary, taking some profits in a luxury automaker after a strong run.

30-Sep-2018 - Dean Tenerelli, Portfolio Manager,

The new position in the aforesaid Belgian bank reduced our underweight allocation to the country. Otherwise, our country weights were little changed. Our country positioning is a function of our bottom-up stock picking.

30-Jun-2022 - Tobias Mueller, Portfolio Manager, European Select Equity Strategy,

We initiated in Essity Aktiebolag, a global hygiene products company, because of attractive valuations and its defensive qualities. In our view, Essity should adjust to the higher prices of raw materials?assuming they don't worsen?and, over time, management should be able to reposition the company into higher value-added segments, reducing dependence on raw materials and the resulting earnings volatility.
We added AXA, a global composite insurer and asset manager, at an attractive valuation. We think return on equity should rise strongly due to an improvement in profitability at commercial insurer XL, back book disposals, capital return, strong cost control, and higher interest rates.
We opened a position in Enel, an Italy-based multinational power company and an integrated operator in the global electricity, gas, and renewables markets. In our view, Enel is a leader of the energy transition in Europe and should benefit considerably from European Union initiatives to curb carbon emissions. The company has a strong management team and a strong renewables pipeline and pays an attractive dividend.
We exited our holding in InterContinental Hotel Group, the third-largest hotel franchisor, to recycle funds into higher-conviction ideas. The company is having to contend with continuing disruptions to the travel and leisure industries caused by the coronavirus, and new unit growth is slowing.
We exited Husqvarna, a Sweden-based company that makes outdoor power and consumer watering products, cutting equipment, and diamond tools for the construction and stone industries. The company issued a profit warning due to a shortage of semiconductors for its robotic lawnmowers and engines for its garden tractors. The Ukraine conflict is compounding existing logistical and supply problems. Increased costs for raw materials, energy, and transportation are set to dent earnings, to a greater extent than the market appears to be expecting.

30-Jun-2022 - Tobias Mueller, Portfolio Manager, European Select Equity Strategy,

Ashtead, an equipment rental company, posted strong fiscal year 2022 results that beat expectations as customers opted to rent equipment rather than buy it due to supply chain constraints. However, the shares continued to decline from an overextended level at the end of last year against a less favorable economic backdrop and, partly, as the U.S. dollar strengthened against the UK pound, reducing the value of earnings when translated back into the home currency.
Rockwool International, a manufacturer of stone wool for insulation and other applications, is another company that fell from overextended levels at the end of last year as market concerns about elevated inflation, central bank policy tightening, and slowing growth intensified. The company was also strongly affected by the war in Ukraine, which drove up the costs of raw materials, energy, and logistics, further eroding margins that were already under pressure from elevated inflation. Even so, the company reported strong first-quarter results, with sales significantly higher, but mainly due to volume growth rather than price hikes.
Zalando, Europe's largest online fashion retail platform, declined sharply year-to-date from overextended levels as well. The stock was a beneficiary of the coronavirus pandemic, which drove consumers online, but this tailwind waned as economies began to reopen. First-quarter results were lackluster, as expected, and guidance was lowered, with management citing the negative impact from the Ukraine conflict. However, the economic backdrop worsened in the second quarter, with higher costs and a loss in consumer confidence denting discretionary spending. The company issued a profit warning for second-quarter and 2022 earnings at the end of the period, surprising the market with the size of its sales and profit cuts.
Greggs, a UK fast-food retailer, posted decent company results for the first quarter as economies reopened and the company opened new stores and adapted to changed conditions; for example, increasing deliveries from shops. However, the shares fell amid concerns about increasing market-wide cost pressures and expectations of a reduction in consumer incomes as the economy teeters on the brink of recession.
We do not own mining names, such as Rio Tinto, that suffered as commodity prices sagged, partly due to lower demand from China, which imposed coronavirus lockdowns, and the higher U.S. dollar. Some of our other holdings, including paper and packing companies Mayr-Melnhof Karton and Mondi, also rebounded after coping with the previous quarter's challenging jump in input costs and resulting pricing decisions.
Verallia, a glass container manufacturing company, rose after delivering resilient first-quarter results that showed strong demand and drove excellent revenue growth, while efficiency gains and significant price increases maintained decent margin expansion. An effective hedging program helped to contain rising energy costs as well.
Our holding in Sampo, a Finland-based financial holdings company, outperformed. The company sold its 25% stake in Nordea Bank, simplifying its structure, and posted strong first-quarter results, lifted by property and casualty insurer If. Investors also expect the company to launch a share buyback with the proceeds from the sale of Nordea, a Nordic bank.

Disclosure on Vendor Indices can be found here.

Risks

Typical Investor