EuropeanFeb 17 2014

Fund Review: T Rowe Price European Equity

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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.

“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.

Looking ahead, the manager remains optimistic on the region and notes that while stocks are not as cheap as they were, they’re still not expensive. “The things that worry me are growth or the lack of it if the recovery doesn’t feed through. The macro statistics look good in Europe, but that’s what we need to see continue. It needs to continue going in the right direction – if that wavers then markets are not going to work.

“The second thing that worries me is China and emerging markets. China is balancing a delicate transition and there are a lot of things it needs to get right. It has also been a motor of emerging markets growth and it’s slowing now so we have to adapt to a world of slower China growth and what that means for our companies.”

Europe has long been an area to avoid for some investors, but with the macro picture beginning to clear, if investors are looking for a slightly different Europe exposure with a strong valuation process, then this fund could be one to watch.

EXPERT VIEW

Martin Bamford, chartered financial planner and managing director, Informed Choice

VERDICT

T Rowe Price is reasonably unknown in the UK for advisers and investors, in spite of its long history and substantial scale. The performance of this fund speaks for itself, with first quartile returns over one, three and five years. As a Sicav with euros as its base currency, it might not appeal to the majority of UK retail investors who want to keep things simple. Investors here in the UK might also find the fund quite difficult to access via their preferred platforms and tax wrappers.