One of the interesting quirks from last year is that for all its problems with moribund growth, Credit Suisse’s near-collapse and Russia’s invasion of Ukraine, European equities actually outperformed their US peers.
The MSCI AC Europe index ended the calendar year down 16.47% in US dollar terms, which was ahead of the -18.11% return for the S&P 500.
In fact, according to research from JP Morgan, European equities have broadly outperformed US stocks since September 2020, initially as a result of the rotation from growth to value and more recently as a result of earnings upgrades as Europe has fared much better than many initially thought they would with the energy crisis.
For those with longer memories, this might not necessarily come as a surprise given the fact that European equities outperformed their US peers during the period from the end of the dotcom boom to the global financial crisis.
Although, for those with shorter memories, this represents a major aberration as US stocks, driven largely by the earnings of a few tech giants, have outstripped their European equivalents over the past decade or so.
In addition, European equities have been hurt over the past decade by the preponderance of stocks in a number of sectors that have been impacted by low interest rates, notably financials as near-zero interest rates ate into banks’ net interest margins.
Given the recent reversal of fortune, this naturally begs the question as to whether it is sustainable or not. Those advocating asset allocators take another look at the continent would point to major structural reforms, including common debt issuance, which has drastically changed the fiscal backdrop.
Against this backdrop, Darius McDermott, managing director at Chelsea Financial Services, chose the CT European Select fund and the Invesco European Equity fund for this week’s head-to-head article.
| Columbia Threadneedle | Invesco | |
| Size | $1.59bn | $2.94bn |
| Inception | 2012 | 2012 |
| Managers | Benjamin Moore | John Surplice, James Rutland |
| Three-year cumulative return | 1.41% | 12.4% |
| Three-year annualised return | 0.64% | 11.37% |
| Three-year annualised alpha | -2.76 | 7.75 |
| Three-year annualised volatility | 22.11 | 21 |
| Three-year information ratio | -0.41 | 1.09 |
| FE Crown fund rating | ** | **** |
| OCF (retail share class) | 0.79% | 0.93% |
Investment approach
The CT European Select Fund has a focus on quality growth based on the supposition that a company’s intrinsic value is comprised of its growth, return on capital, sustainable competitive advantage and pricing power.
The fund managers base their ideas around a combination of thematic and sector views, company meetings and external research. Generally, companies that are likely to feature are those that fit one of a number of characteristics including that they are under-researched or that there has been a major corporate event.
The fund managers will sometimes look at stocks without pricing power but this is usually only if the firm is the lowest cost producer in its sector.
There is a preponderance of consumer and tech stocks in the portfolio, while banks and telecoms companies feature less heavily. The portfolio is concentrated at around 50 stocks, with almost half held in its top 10 holdings.
Conversely, the Invesco fund is more focused on value stocks. The fund managers look at around 600 companies, which is whittled down to around 50 holdings.
At the heart of the fund’s investment process is mispriced change, which can take the form of stocks moving from a poor to good outlook or good to great. The fund also targets “great companies that stay great”.
The fund managers spend a lot of time with management to try to identify these changes. They tend to look at companies on a three-to-five-year view with turnover at about 40%. Historically, the fund is diversified across different sectors and is high conviction meaning that the top 10 holdings account for around a third of the fund.
Fund characteristics
Country allocation:
| Columbia Threadneedle | Invesco | ||
| n/a | n/a | France | 33.78% |
| n/a | n/a | Germany | 19.06% |
| n/a | n/a | Netherlands | 7.17% |
| n/a | n/a | Finland | 6.55% |
| n/a | n/a | UK | 5.88% |
| n/a | n/a | Spain | 5.53% |
| n/a | n/a | Italy | 5.34% |
| n/a | n/a | Switzerland | 3.61% |
| n/a | n/a | Denmark | 3.57% |
| n/a | n/a | Luxembourg | 1.92% |
| n/a | n/a | Ireland | 1.72% |
| n/a | n/a | Portugal | 1.48% |
| n/a | n/a | Sweden | 1.47% |
| n/a | n/a | Norway | 1.02% |
| n/a | n/a | Austria | 0.68% |
| n/a | n/a | Cash | 1.21% |
Sector allocation:
| Columbia Threadneedle | Invesco | ||
| Industrials | 19.4% | Financials | 19.82% |
| Technology | 18.7% | Industrials | 14.62% |
| Consumer Discretionary | 16% | Energy | 12.33% |
| Financials | 15% | Healthcare | 11.66% |
| Healthcare | 11.1% | Basic Materials | 8.76% |
| Consumer Staples | 10.5% | Utilities | 7.71% |
| Basic Materials | 7.9% | Consumer Discretionary | 7.56% |
| Cash Equivalents | 1.3% | Technology | 6.74% |
| Cash | 0.2% | Consumer Staples | 6.55% |
| Telecommunications | 3.04% | ||
| Cash | 1.21% |
Top five holdings:
| Columbia Threadneedle | Invesco | ||
| ASML Holding | 5.7% | Total | 5.04% |
| Schneider Electric | 5% | UPM | 3.78% |
| Nestle | 4.8% | Roche | 3.61% |
| Novo Nordisk | 4.7% | UniCredit | 3.08% |
| LVMH Moet Hennessy Louis Vuitton | 4.7% | Capgemini | 3.08% |
Performance
The CT European Select Fund has a quality growth bias, notes McDermott.
“As such, the fund is likely to exhibit higher sales and earnings growth, offer better quality metrics such as lower debt, higher returns on capital and better stability of earnings, but this is likely to result in more expensive valuations than the market,” he said.
As a result, the fund tends to do better when growth stocks do well, but struggles more when value stocks are in the ascendancy. Unsurprisingly, the fund fared well in 2021 but less so in 2022.
Conversely, the Invesco fund has more of a value bent, which explains why the fund lost only 9.8% last year compared with 17.4% for the benchmark.
The CT fund has an ongoing charge of 0.79%, while the Invesco fund is slightly expensive at 0.93%, although not by too much, notes McDermott.
Discrete calendar year performance
| Fund | YTD* | 2022 | 2021 | 2020 | 2019 |
| Columbia Threadneedle | 6.81% | -16.98% | 17.38% | 16.58% | 27.42% |
| Invesco | 8.14% | 2.08% | 16.31% | -1.5% | 12.78% |
Manager review
Both teams have seen a fair amount of turnover lately. The CT fund lost a number of managers to Jupiter, while Jeff Taylor, who headed up the European equities team at Invesco, retired at the end of 2020.
“However, both teams are fully stocked with talent and, importantly, the processes which made the funds successful remain unchanged,” said McDermott.
The CT fund is led by Ben Moore, who took over as lead manager in January 2021 having previously run the fund alongside David Dudding.
Meanwhile, the Invesco fund has been managed by John Surplice and James Rutland since December 2020.
Surplice has good pedigree having worked on European equities for 20 years at Invesco, while Rutland joined in 2020 following six years at Schroders.
Conclusion
McDermott notes that both funds could work well within a portfolio.
“If you believe there is an opportunity in Europe – and did not want to put all your eggs in one basket – then combining these two would actually cover a lot of opportunities in the region,” he said.
The Invesco fund has fared well since 2020 on the back of the return of re-emergence of value, while the CT fund has a proven process, McDermott notes.
