Europe's economic outlook could be set to benefit from a depreciating euro; quantitative easing initiated by the European Central Bank; and declining oil prices, putting money in the pockets of consumers.
The pace of Europe's recovery, however, remains slow as it continues to struggle to leave the legacies of the euro zone crisis behind it. Overall economic growth remains relatively sluggish and, in this environment, Alister Hibbert, manager of the BlackRock European Dynamic Fund, remains focused on high-quality businesses that he believes can perform even in a lower growth world.
In his search for quality franchises he asks: why will a business that is good today, remain so? In doing so, he considers whether a company has the ability to sustain its high return on equity (a measure of a firm's profitability) over a prolonged period.
This focus on quality often leads the manager to invest in more defensive areas of the market, or consumer-related industries. This could include well-known consumer brands, where demand for their products tends to remain relatively buoyant, or even some luxury goods companies. It also includes sectors such as healthcare, which currently comprises one fifth of the portfolio. In Alister Hibbert's view, the healthcare industry has plenty of growth potential, while many companies also remain attractively-valued.
Overall, however, Alister Hibbert has maintained what he believes to be a diverse mix of companies across a variety of sectors. For example, ASML, which produces semiconductor manufacturing equipment, is one of the fund's current largest holdings. The manager views the company as a great franchise - it follows the principles of Moore's Law (an observation that the processing power of computers will double every two years) in its aim to produce ever smaller, cheaper, more powerful and energy-efficient semiconductors. Alister Hibbert believes it would cost other businesses a considerable sum of money to break into this market, so ASML benefits from high barriers to entry from competition.
Alister Hibbert also invests in lower-quality, more economically-sensitive businesses when he anticipates he will be rewarded for doing so. These positions tend to be held for a shorter period compared with their higher-quality counterparts. Overall the fund is a relatively concentrated portfolio which enables each holding to make a significant impact on returns, but this is a higher-risk approach. The fund manager can also invest in smaller companies which adds further risk.
Our view on this fund
Alister Hibbert has the support of a well-resourced team at BlackRock who he has worked with for several years. Since he assumed responsibility for this fund in March 2008, it has grown by 136.7%* compared with 50.5% for the FTSE World Europe ex UK index and 48.9% for the average fund in the sector, although please remember past performance is not a guide to future returns.
|Annual percentage growth|
| June 10 -
| June 11 -
| June 12 -
| June 13 -
| June 14 -
|BlackRock European Dynamic Fund||41.07%||-20.07%||45.06%||13.08%||9.01%|
|FTSE World Europe ex UK||25.07%||-25.05%||43.08%||15.00%||4.07%|
|IA Europe ex UK||27.01%||-22.07%||42.08%||12.08%||5.08%|
Past performance is not a guide to future returns. Source: Lipper IM* to 01/06/15
Over the longer term, our analysis points towards stock selection as the key driver of returns. The manager has also tended to be successful in tilting the portfolio towards more economically-sensitive areas of the market at the right time.
The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors. While we view the fund as a good choice for exposure to the European market, we currently have greater conviction in other managers in this sector. Furthermore, given the manager can move the portfolio around relatively aggressively at times, it has tended to be more volatile than our existing Wealth 150 options and the average fund in the sector. The fund is also capacity constrained, meaning it has the potential to apply an initial charge in future should the fund’s size reach a certain limit.
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