- Focus on quality companies delivering steady earnings growth has held back recent performance
- Lowly-valued and more economically-sensitive sectors, which the manager has avoided, have outperformed
- We rate David Dudding as a skilled and experienced manager in the European sector
There has been a change in leadership within the European stock market. The share prices of growth companies have raced ahead of their value-oriented peers for several years, but in recent months there has been a reversal of this trend.
Amid economic uncertainty and low interest rates, many investors have been drawn to the safety of high-quality growth companies favoured for their dependable earnings and reliable dividends. With inflation expectations rising, which has historically led to rising interest rates, the yield and return available on more ‘defensive’ stocks appears less attractive. There has been a distinct shift in the performance of previously-popular growth sectors, such as consumer goods, healthcare, and technology, towards the once-disliked financials and commodity-related industries.
Given its bias to high-quality companies with good growth prospects, the Threadneedle European Select Fund, managed by David Dudding, has recently underperformed the broader European market. Around one third of the fund is invested in consumer goods businesses, such as Unilever, while a bias towards the healthcare sector (15.4% of the fund) has held back performance.
Shares in Novo Nordisk also struggled after the pharmaceuticals firm announced pricing challenges in the US and the loss of a large contract for one of its best-selling insulin drugs. The size of this investment has since reduced, although the manager maintains a smaller position as he still sees some long-term growth potential; the company is undertaking a review of drug-development projects and has announced plans to streamline its workforce.
The recent change in the market environment has not altered the type of company David Dudding seeks. He believes the recent setback makes the share prices of many of these companies more attractive and is prepared to add to favoured investments during further periods of market weakness.
Elsewhere, the manager continues to avoid businesses whose earnings are very sensitive to fluctuations in the economic cycle. Little of the portfolio is invested in sectors such as financials, which represents 8% of the fund compared with almost 22% for the benchmark. Overall the fund is a concentrated portfolio, which means each investment can have a significant impact on performance, but this is a higher-risk approach.
It will take time before the full economic repercussions of major events, such as the EU referendum and the victory of Donald Trump in the US presidential election, become clear. David Dudding therefore believes stock markets across the globe will remain volatile in the short term.
However, he also sees reasons for optimism. European markets could benefit from quantitative easing by the European Central Bank and low energy prices, which could put money in the pockets of consumers and reduce input costs for some businesses. Low interest rates and borrowing costs could also lead to a pickup in merger and acquisition activity. Overall, he continues to favour companies with robust earnings prospects and pricing power, which means they can often raise prices without significantly reducing demand for their products and services.
Our view on this fund
While the fund has underperformed the broader European market in the short term, longer term performance has been impressive. Under David Dudding’s stewardship since July 2008, the fund has grown 129.4%* compared with 66.9% for the FTSE World Europe ex UK Index, although please remember past performance is not a guide to future returns.
|Annual Percentage Growth|
| Nov 11 -
| Nov 12 -
| Nov 13 -
| Nov 14 -
| Nov 15 -
|Threadneedle European Select||24.9||19.9||7.7||6.6||8.0|
|FTSE World Europe ex UK||13.8||26.9||5.7||0.2||12.1|
Past performance is not a guide to future returns.
The manager’s focus on quality companies means the fund has tended to outperform during periods of market weakness, while it has also demonstrated less volatility than its peers. On the other hand, the fund may lag a rapidly rising market or when some of the more economically-sensitive areas of the market perform well, as seen recently.
We continue to rate David Dudding as a skilled and experienced manager in the European sector and the fund features on the Wealth 150+ list of our favourite funds at the lowest ongoing charge. The Vantage charge of up to 0.45% also applies.