Best in Class: Barings Europe Select Trust
Whether it be geopolitical challenges, domestic elections, ongoing Brexit tensions or vaccine nationalism, the headlines around Europe have been largely negative in 2021.
This is nothing new – Europe has been unloved by investors for years, having lagged its global peers for more than a decade. Despite signs of optimism – such as improving manufacturing data and hopes that a broader economic recovery would benefit Europe and its plethora of cyclical companies – sentiment does not appear to be changing.
Unfortunately, European smaller companies appear to have been tarred with the same brush, despite having comfortably outperformed their larger peers in the past decade, returning 158 per cent (versus 91 per cent for the MSCI AC Europe).
The opportunity is immense for an area of the market that is under-researched when compared with its larger counterparts, with some 2,500 quoted European stocks with a market capitalisation of between £100m and £5bn, compared with circa 400 with a market cap of more than £5bn.
Small-cap companies can also give investors better exposure to an individual country, allowing them to really respond to cyclical differences across European nations – something that cannot be underestimated in this recovery phase in markets. They also offers access to industries that are less prominent in other regions, such as green energy.
Yet European small-caps have continued to trade at a discount to their global peers in recent years – making it a market ripe for good stock pickers, and this week’s Best in Class fits that profile.
Barings Europe Select Trust invests in small and medium-sized companies and is run on what is known as a Garp (Growth at a Reasonable Price) basis. The fund is run by a team of four co-managers: Nicholas Williams, Colin Riddles, Rosemary Simmonds and William Cuss.
Williams is head of the small-cap equities team at Barings and has managed this fund since 2005.
The investment process starts by filtering the company universe with a liquidity screen for risk purposes. There must be enough trading volume to sell 75 per cent of the holding within five days. This leaves around 1,600 companies in the investable universe.
The next phase uses some proprietary quant screens developed in collaboration with the wider company, as well as qualitative inputs. The quantitative screens focus on the stocks’ financial criteria, preferring companies with low debt, good returns on the money they invest and good cash generation from operations. This helps score the universe on the Garp metrics the managers prefer.
The most attractive ideas then go through in-depth fundamental analysis. The managers will go through a company’s financials, verifying the quant data and creating a five-year forecast. They will also do wider analysis around the company, including company meetings, sector/industry analysis and environmental, social and governance considerations.