Barings Europe Select: January 2022 fund update

• Lead fund manager Nick Williams is one of the most experienced investors in the European Smaller Companies sector
• The fund has delivered higher returns than the average fund in the European Smaller Companies sector over the longer term
• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Barings Europe Select is different from many other European funds. The fund managers invest in small and medium-sized companies they feel can grow earnings steadily and offer strong growth potential. Most other European funds focus on larger, more established companies. The focus on small and medium-sized companies does increase the risk though.

We think the fund could be used to diversify the European element of an investment portfolio, or a broader global portfolio focused on growth.

Manager

Nick Williams is the Head of Small and Mid-Cap Equities at Barings. He’s built over three decades of experience investing in Europe and has managed funds investing in companies of all sizes. We believe this has given him superior knowledge of the wider European market over the length of his career.

Williams joined Barings in 2004 and took over management of the Europe Select fund shortly after. There aren’t many fund managers with such a long and successful track record of investing in this less familiar area of the European stock market. Williams is one of the few. He has demonstrated a long-standing commitment to his investment process and it’s a quality we rate highly.

Aside from his own experience, Williams is supported by co-managers Rosie Simmonds, Colin Riddles and William Cuss. He has a strong team of analysts to call upon too, alongside the research of other teams at Barings, including the Pan European and Global teams.

Process

Williams has followed the same investment process for many years – investing in companies he believes can grow their earnings steadily, but whose shares can be bought at a lower price than the earnings potential suggests they should be. This is also known as GARP (Growth at a Reasonable Price).

Williams instils this focus across his team. They scour the continent to identify smaller European companies they believe are in good financial shape, have low levels of debt, and are run by quality management. They’ll also only invest in a company if they believe its share price can rise by at least 40%. Companies should also be sufficiently liquid, meaning their shares should be relatively easy and quick to buy and sell.

The managers focus on the prospects of individual companies and invest in those they believe will do well regardless of what’s going on in the economy – their focus is ‘stock selection’. If a company’s shares hits their price target, the team will either sell some shares and take the profits, revise their price target if they think there is further room for growth, or sell it in order to move on to the next opportunity. If the share price falls by 20% the team will sell the investment.

We like the team’s disciplined investment approach, which has served investors well over the longer term. And we’ve seen the approach in practice over the past year.

GN Store Nord, a Danish medical equipment manufacturer, and recipe box delivery business HelloFresh were sold from the fund, after reaching their share price targets. The team also has some concerns over HelloFresh going forward and feels there are better opportunities elsewhere.

Nordnet, one of the leading digital financial platforms in Europe, was added to the fund. The company’s services have seen more demand recently and are attracting more customers. Cargotec, a Finnish logistics company, and French based semiconductor manufacturer Soitec were also added for their long-term growth potential.

Culture

We view Williams as the key manager behind this fund, and currently most of our conviction lies with him. But we are satisfied by the fact he's built a robust and collaborative team around him. All team members follow the same process, and they're encouraged to bring challenge and debate to each other's investment ideas, which we think is important.

The team are also influential throughout Barings, among other analysts and portfolio managers, which reflects their strength and fund management abilities. Williams also co-manages a few other funds at Barings, but we are comfortable his main focus is on European equities.

The team has integrated environmental, governance and social (ESG) factors into their work for a number of years.

They utilise nine key topics to help assess a company’s ESG impact, which could highlight businesses that use more sustainable practices and can thrive over the long term. This may also help uncover risks that are less obvious through more traditional company analysis. The team also aim to enhance their engagement with companies.

Cost

This fund is available at an annual ongoing fund charge of 0.81%, but we've secured HL clients an ongoing saving of 0.10%. This means you pay a net ongoing charge of 0.71% and makes the fund one of the lowest-cost actively managed funds available in the European Smaller Companies sector through HL.

The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Williams became lead manager of the Europe Select fund in January 2005. Over his tenure the fund has returned 773.35% versus 596.26%* for the average fund in the IA European Smaller Companies sector. Over the longer term this fund has tended to hold up better than the broader market when it's fallen. It hasn't kept up quite as quickly when the market has risen though. This isn’t a guide to how the fund will perform in the future.

The fund hasn’t managed to keep pace with a quickly rising market over the past 12 months, though this is within our expectations. The fund returned 13.94% over this period compared with the IA European Smaller Companies gain of 19.34%.

Stroeer, an advertising firm, and French automotive supplier Plastic Omnium were some of the fund’s weaker performers. Stroeer struggled with the renewed lockdowns across parts of Europe and Plastic Omnium battled against supply chain bottlenecks and inflation. Some “lower quality” companies and sectors that are more sensitive to the health of the economy did well, such as financials. The fund has less invested in these areas compared with the benchmark, so this held back performance too.

Other companies performed well though. Semiconductor manufacturer ASM International and chemical distributor IMCD were the fund’s top performing companies over the past 12 months. Supply chain bottlenecks boosted semiconductor demand, benefitting ASM International. Whereas IMCD released a strong set of results, boosting demand, and recently agreed to acquire chemical supplier POLYchem.

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2021.

Find out more about Barings Europe Select including charges

Barings Europe Select Key investor information