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Nicholas Williams, manager of the £297.6m Baring Europe Select trust, aims to beat his benchmark, the HSBC Smaller European (ex UK) index, by 3 percentage points over a five-year period. And while he has managed the fund for just over three years, he has gone a long way towards meeting that goal.

For the year to 16 June - a difficult period for the sector - the fund lost 2.5 per cent compared with the sector’s average loss of 14 per cent, according to Morningstar. And while losing less than the sector may be cold comfort, over the last three years the fund has returned 73.8 per cent, against the sector’s average of just 57 per cent - a top-decile showing.

According to Mr Williams, one factor behind the success of the fund - a bottom-up, “growth at a reasonable price” unit trust - has been a clear focus on risk control. “Over the long term,” he says, “a risk-adjusted return shows a manager is doing a good job, as opposed to taking a punt on one hot sector after another - this fund aims for the former.”

Every week, Mr Williams does a stock-by-stock analysis on the portfolio’s risk, looking at the impact of each holding and the suitability of the fund’s weightings for sector, country and market capitalisation. But, in terms of portfolio construction, the important thing, Mr Williams emphasises, is to produce a good risk-adjusted return, much of which is “backwards derived from the stock-selection process”.

He also looks at the portfolio’s style characteristics, considering such factors as return on equity, undiscounted earnings growth, cash-flow generation and debt. “We want to ensure the kinds of stocks we own, in aggregate, give the kinds of results one would expect from a ‘growth at a reasonable price’ portfolio, which tends to outperform over the longer term,” Mr Williams says.

The key driver of performance, then, is stock selection. “Sector and geographic attribution typically provide plus or minus zero to our relative return,” he says. “I don’t want our returns to be driven by one theme or sector or geography. I want the portfolio to be more diversified because that’s far better risk management.”

Of the 5000-odd small and mid-cap companies comprising the fund’s universe, Mr Williams considers only those that meet his liquidity and “shareholder friendliness” requirements, which narrows the field to 2500 stocks. A quant team then screens about 1200 of those companies on a number of factors, leaving 500 stocks Mr Williams feels are “worth following up”.

“First principles, the Barings process is bottom-up and growth at the right price,” Mr Williams says. “The quant screens are designed to catch some of those attributes, doing a decile ranking of attractiveness to capture both growth and value attributes. It basically works on the assumption that growth is driven by earnings upgrades, while value is driven by more of a price-to-book/return-on-equity basis.”

Another important contributor to performance has been the disciplined use of price targets. Each stock has about nine months to reach its price target - if it fails to meet that target within that timeframe, it tends to be jettisoned from the portfolio.

“If it doesn’t meet its target, then I worry my analysis is wrong, and if my analysis is wrong, I have to ask myself what I am holding the stock for,” Mr Williams explains. “You have to believe in the evidence of the share price, and if the evidence says your analysis is wrong, there’s no point in sticking your head in the sand.”

One example of where Mr Williams got his analysis right is Belgium-based Umicore, a precious metals company that, instead of mining ore, recycles scrap metal. Accounting for 2.1 per cent of the portfolio, the stock is one of Mr Williams’s two largest holdings. “It has been quiet this year, but last year was pretty good,” he says. “Umicore is pretty close to fulfilling its price target.”

His other largest holding, Andritz, has gained roughly 12 per cent this year. The Austria-based engineering company, which produces plants for the pulp and paper industries, is “more of a nine-month holding”, but Mr Williams decided to buy it as “people were too negative on it toward the end of last year”.

His third-largest position, Switzerland-based Lonza Group, is more of a long-term holding. So far this year, the pharmaceuticals ingredients company’s share price has risen by 14 per cent. “We’ve basically doubled our money in the stock over the last couple of years, the management team is very impressive, and they still have a couple of aces up their sleeves for cashing in on intellectual property.”

At the moment, Mr Williams admits that it is not easy to be “super optimistic” about European equities, but there are opportunities to be had, he says.

“Everyone is down in the dumps, but when you look at valuations, both of large and small caps - even if earnings estimates get cut - they’re still relatively cheap compared with bonds and historic averages. Given how vicious some of the sell-offs have been in certain parts of the market, there are certainly opportunities - even now.”