Achieving diversification in a European Equity portfolio

This article is part of
Guide to European equities

Lorenzo La Posta, analyst at Momentum Global Investment Management, elaborates on this idea.

He says: “The past 10 years have seen a homogenous group of stocks outperforming the rest of the equity market, both on a global basis and in Europe.

“Large-cap, quality-growth businesses have won over value, defensive and small-cap companies in what has been a low-rates, low-volatility environment, arguably a benign one for long-duration assets (as quality growth equities often are).”

In hindsight, a concentrated portfolio of such names would have been the best choice but looking forward, given the stretched valuations of many businesses that are arguably priced for perfection, this might leave too much room for disappointment. 

Fahad Hassan, chief investment officer at discretionary fund house Albemarle Street Partners, says the European equity markets have much less exposure to volatile sectors such as energy than in the past.

He believes the number of “quality companies”, that is, businesses that are less exposed to the performance of the wider economy, has risen in Europe in recent times. 

Such businesses are able to act as diversifiers in all market conditions. 

He says: “Unlike the FTSE 100, the broader European stock indices offer investors access to a range of sectors. Healthcare, industrials, financials and consumer staples make up 60 per cent of the market. The IT sector has grown in importance and now makes up 10 per cent of the market. Energy accounts for less than 3 per cent of the index.” 

Ben Peters, global equity income fund manager at Evenlode, says that by pursuing tech stocks almost to the exclusion of all else, “the market has ignored the value of stability as it chases growth. Some of the large consumer companies in Europe, for example, sell goods for which there is constant demand; the growth rates of these businesses will never approach that of technology companies, but the growth is stable and predictable. For many years the market ignored those, and while valuations have risen since then, they are still not expensive”.

Michael Crawford, chief investment officer and global equity fund manager at Chawton Global Investors, says European listed shares are the largest individual component of his fund, with a desire for diversification a key reason. 

He says: “Europe has many high-quality listed companies in the consumer staples and healthcare sectors, as well as being richly endowed with leading industrials mentioned above.

“We regard the staples industry as having especially attractive characteristics due to stable demand, low asset intensity and high returns on capital achieved.

“Examples are Nestlé, Unilever and L’Oréal, which are now among the largest companies in the region. There are also substantial and well-positioned pharmaceutical companies, such as Roche of Switzerland and Novo Nordisk in Denmark.