It does not take a rocket scientist to understand the European economy is facing a number of significant challenges at present.
The region is in the eye of the storm as trade wars, reduced support from central banks and slower economic growth placed significant downward pressure on equities in 2018.
The MSCI Europe, which captures large and mid-cap representation across 15 developed markets in Europe, fell 9.57 per cent in the last calendar year, according to data from FE Analytics.
Investors duly voted with their feet, with the Investment Association reporting net outflows of £1.3bn in total in 2018 across its three main European sectors.
The valuations of European equities in some countries have now fallen to levels that imply a recession.
In addition to strong performance in buoyant periods, the fund has also been resilient in troubled times.Entrenched in political discontent, Italy already fell into a technical recession in the final quarter of 2018, after seeing its economy shrink 0.2 per cent.
Consequently, valuations from its main index are now below levels reached during the sovereign debt crisis.
Meanwhile, Germany only narrowly avoided the same fate and its stock market valuations fell below those reached in the 2008 to 2009 global financial crisis.
With markets pricing in a recession (or near-recession) scenario it also means opportunities for investors. The challenge is finding the right fund to seek out those opportunities and exploit them.
This week’s best in class fund, I believe, is positioned to do just that: the £169m Waverton European Capital Growth fund.
The fund is run by two highly-experienced managers in Chris Garsten and Charles Glasse, who have both been at the helm since the fund was launched in April 2001.
The managers adopt a refreshingly straightforward approach to investing. They build a high conviction portfolio of 30 to 40 stocks.
Their process sees them avoid weaker businesses with poor corporate governance and, instead, focus on finding companies with five key attributes: aligned interests, earnings visibility, pricing power, cash generation and return on capital.
Not all stocks added to the portfolio immediately demonstrate all of these traits, with the managers targeting companies in the early stages of reform – this allows them to benefit fully from those changes – for example, a new management structure within a business.
Although the fund is highly concentrated, the managers try to avoid taking overly big bets in any company, sector or country.
Currently the largest country exposures, the fund fact sheet for January 31 2019 shows, are in Germany (21.1 per cent), Sweden (18.8 per cent) and France (16.1 per cent), while the largest individual stock holdings are in pharmaceutical company Novartis, at 5 per cent, and industrial gas company Linde, at 4.3 per cent.
The proof of their process is highlighted by performance, with the fund producing a return of 196.6 per cent since inception, compared to a return of 83.3 per cent for the MSCI Europe ex-UK index, the fact sheet shows.
In addition to strong performance in buoyant periods, the fund has also been resilient in troubled times.
For example, during the height of the European sovereign debt crisis in 2010 to 2012, the Waverton fund had a total return of 0.93 per cent, compared to an average fall of 12.93 per cent for Europe ex-UK sector funds, according to FE Analytics data from January 1 2010 to July 26 2012 based against the FO Equity Europe ex-UK total return index.
Another element of their fund I like comes courtesy of the structure of Waverton Investment Management, where 37.5 per cent of the business is owned by its employees.
Manager interests are further aligned with investors as they are also invested in their own strategies, while all funds are capacity constrained to ensure they do not become too large.
The performance of this fund, coupled with the experience of the managers, makes it a strong candidate for being a core European holding for investors.
Darius McDermott is managing director of FundCalibre
