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Fund Review: T Rowe Price European Equity

A combination of a strong focus on valuation using a discounted cash flow (DCF) process as well as an understanding of the drivers of a business and the return on capital employed has helped the T Rowe Price European Equity fund outperform its benchmark MSCI Europe index in each of the past five years.

The €223.6m (£185.8m) Luxembourg-based Sicav aims to deliver long-term capital appreciation by investing in a portfolio of companies incorporated in Europe or conducting the predominant part of their business activity there.

Portfolio manager Dean Tenerelli notes: “The investment process I focus on is buying companies with a historic and sustainable good return on capital employed, so I’m focusing on companies that add value through their businesses.

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“Basically, I’m trying to buy good companies as defined by their returns. I use a strict DCF valuation for all of them. I say strict because I tend to limit the amount of growth I’m willing to pay for and I strip out growth from the DCF into perpetuity, so it’s a very tough threshold to cross over in terms of a valuation standpoint.”

He points out that the aim is to try and buy very good businesses over the long term, but buy them cheaply on cashflow valuations. However, he adds the fund itself is both size- and style-agnostic. “Growth value doesn’t matter to me – if they work on a DCF and they are good businesses and I understand why they’re good businesses then I’ll buy them,” he explains.

As a pure stockpicking fund, the macro situation is something that only tends to touch its edges, with the focus more on the industry, the companies and the valuations. Mr Tenerelli adds: “To the extent last year that certain markets sold off because Spain was really cheap, I found a lot of stocks on my watchlist were coming into ‘buy’ territory. So I have a lot of holdings in Spain, but that was driven by company valuations.”

For the five years to February 5 2014, the fund has significantly outperformed its benchmark MSCI Europe. It produced a return of 125.78 per cent compared with the index return of 81.77 per cent. In 2013 it also beat the benchmark with a return of 34.96 per cent while the MSCI Europe index returned 23.62 per cent.

Mr Tenerelli notes: “In 2013 I had 15 per cent of my fund in Spain – I still do –and that was a big change, but also financials went from being underweight to very overweight. The presence of media in the portfolio also increased.”

The manager notes that while he’d noticed a lot of stocks showing good value in Spain, it wasn’t until there was some reassurance that Europe and the European Central Bank would effectively ‘stand behind’ the sovereign that he acted on some of his buy valuations. In terms of the portfolio financials, including a couple of Spanish banks such as Bankinter and some Scandinavian names, helped boost performance in 2013. In addition, media stocks also added to performance while the unusually cheap valuations meant the manager could also hold some software names that are typically too expensive to meet the process.