The Greek debt saga made the headlines again over the summer, only recently being overshadowed by concern over China's slowing economy. While it is unlikely we have heard the last of Europe's economic woes, the outlook for European companies is not as bad as some news headlines imply.
Improving corporate prospects
Many European companies have worked hard to cut costs since the depths of the financial crisis, emerging leaner and more efficient. Retail sales and consumer spending have started to pick up and with fewer costs to cover, this should feed through to profits. Companies with overseas sales should also feel encouraged as the US recovery continues to strengthen while the UK economy is also in reasonable shape.
The improving backdrop has already started to feed through to company earnings and this bodes well for European stock markets, in our view. If earnings growth continues, share prices should ultimately follow. Although the shares of European companies have already recovered somewhat, they still look cheap compared with both their own history and other developed markets such as the US.
A new way to invest in Europe
The FP CRUX European Fund is set to launch on 2 November 2015. With the aim of capitalising on some of Europe's best long-term growth opportunities, the fund will be managed by renowned European investor, Richard Pease. He will be joined by James Milne who has worked closely with Richard Pease for several years.
The managers will focus on what they believe to be the highest-quality European businesses competing on a global stage, and will specifically seek companies operating in niche or specialised sectors.
Tried-and-tested investment approach
The new fund will employ the same rigorous investment approach as the FP CRUX European Special Situations Fund, also managed by Richard Pease and a current Wealth 150+ fund, focusing on four key criteria for stock selection:
How will the fund compare with FP CRUX European Special Situations?
The European Fund will mainly focus on larger companies and invest in around 40 holdings, meaning a greater proportion of the fund's assets will be invested in each company. This concentration enables each holding to make a significant impact on returns however the strategy carries risk. This compares with 60 companies for the European Special Situations Fund, which invests in a greater number of higher-risk smaller companies. This means the latter fund has the potential to be more volatile, although it could offer greater potential for outperformance over the long term.
How will the fund be positioned at launch?
Richard Pease and James Milne focus on the prospects for individual companies and are agnostic in terms of the country in which a company is based.
The industrials sector is likely to represent the fund's largest industry weighting, although this sector comprises a wide variety of businesses. Companies such as SGS and Bureau Veritas, which test and inspect the quality and safety of products, will feature here. Another example is Huhtamaki, which makes cups for Costa and McDonalds. According to the managers, there are few companies in this market operating on such a large scale, meaning they can manufacture their product at relatively low cost and benefit from strong distribution networks.
The managers also favour companies supplying products that are highly important to the customer, but where the cost forms a small part of the overall price of goods. A good example is the flavours and fragrances industry, where products made by IFF (International Flavors & Fragrances) and Givaudan, companies expected to be held in the portfolio, are vital to the final product yet cost a fraction of the sale price to manufacture. Flavourings companies are ultimately able to pass on cost increases as businesses are reluctant to use alternatives for fear of altering the flavour or smell of their products.
Our view on this fund
Richard Pease has an outstanding record of managing European equities, and we believe he has the skills and experience to deliver good returns for investors over the long term. The fund will be managed in the same way as one of his previous ventures, the Henderson European Growth Fund, on which he built a strong track record. While managed in the same way, his new fund will behave differently to previous funds he has managed, so past performance should not be seen as an indicator of future returns.
Henderson European Growth Fund performance under Richard Pease
Source: Lipper IM, to 15/10/2014
The fund will not be added to the Wealth 150 list of our favourite funds across the major sectors at this time. Presently, for access to Richard Pease's stock-picking skills, we prefer the FP CRUX European Special Situations Fund, which features on the Wealth 150+. While the two funds focus on similar themes, we believe the European Special Situations Fund offers greater potential for long-term outperformance given its exposure to small and medium-sized companies. We feel the manager has previously demonstrated an ability to add value in this area of the market.