We recently marked the fifth anniversary since Mario Draghi declared he would do “whatever it takes” to keep the European economy afloat and the euro currency alive. After five long years, finally things seem to be working out.
On a macro level political risks remain, but the election of Emmanuel Macron in France and the potential re-election of Angela Merkel in Germany bode well for relationships between Europe’s core economies.
Having suffered from deflation in the wake of the sovereign crisis, the eurozone’s inflation is now in positive territory, consumption is rising, employment numbers are improving and the economy is growing.
On a micro level, after several years of mediocre growth at best, the reporting season in March saw a raft of European companies posting earnings upgrades. Having seen expectations decline dramatically during each of the past six years, earnings expectations this year are importantly still rising into the second half.
For investors, European equities not only look better value compared with other developed equity markets (especially the US) but also compared with their own bond market. With very low bond yields and the possibility that the European Central Bank’s nine-year rate cutting cycle could soon be at an end and that bond purchases could be tapered in the coming months, a rotation from bonds to equities is a distinct possibility.
Slowly but surely, European equities have been making a comeback. European equity funds have outperformed UK equity funds by 5 per cent per annum for the past two-and-a-half calendar years.
One of my long-term favourite European equity funds is Threadneedle European Select. It has been run by Dave Dudding since 2008.
Dudding is an extremely experienced investor and enjoyed considerable success managing the company’s European Smaller Companies fund from 2002 to 2012. At that point, he decided to focus on this, Threadneedle’s core European offering. He is one of the most down-to-earth fund managers I know and is always conscious that other people have trusted him to manage their money.
Dudding has developed a distinctive process, which focuses on industry structure and a company’s competitive position. He tries to identify industries with barriers to entry and quality companies that have strong brands – firms that can defend their margins with the ability to raise prices in any economic environment.
As a result, the fund has shown itself to be especially strong in down markets. The process is a patient one. He believes the market underestimates the ability of some firms to sustain high returns and he is a long-term investor in the stocks he owns.
The process is pretty much pure stock selection and the team wastes very little time looking at macroeconomic factors. With almost 50 per cent of assets in its top 10 holdings, the fund takes a high-conviction approach.
Dudding’s investment process has repeatedly proven itself over the past nine years. He has a fantastic understanding of the companies he invests in and has delivered some of the strongest returns in the sector while simultaneously running one of the least volatile funds.