CT European Select: November 2022 fund update

• Benjamin Moore is lead manager of the fund, supported by Roberta Zeno and David Dudding as deputy managers
• The managers focus on high quality companies they believe offer sustainable returns and strong growth potential over the long run
• Performance has been strong over the long term, but the fund has struggled more recently
• The fund features on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The CT European Select fund aims to grow your investment over the long term by investing in high quality European companies. The managers mainly invest in larger, more established European businesses. We think it could be a good choice for exposure to Europe within a global investment portfolio or sit alongside other European funds using different investment styles within a broader portfolio.

Manager

Benjamin Moore was appointed lead manager of the fund in January 2021 having been co-manager since April 2019. He’s been part of Colombia Threadneedle’s (CT) European equities team since 2015, where he initially analysed European smaller companies and served as deputy manager of the European Smaller Companies Fund. Prior to this, he spent six years with Goldman Sachs as a European small and mid-cap equities analyst.

Roberta Zeno, who is a deputy manager of the fund, joined CT last year. Her career in financial services started in 2008 and over that time she’s worked for Close Brothers Asset Management, S&P, and Schroders in roles including equity research.

David Dudding is also a deputy manager of the fund. Given his experience and success on this fund in the past, we’re encouraged he remains involved as deputy manager. He’s also lead manager of the CT Global Focus fund, of which a third invests in Europe, so he still spends a lot of his time analysing European companies. It also means he continues to work closely with both Zeno and Moore, sharing ideas and discussing market trends.

The managers are supported by a well-resourced European equities team at CT. This group of analysts act as an important source of ideas for the managers and provide plenty of challenge and debate when it comes to investment decisions.

Process

The managers look for high quality companies they believe offer sustainable returns and strong growth potential over the long run. They prefer companies who operate in industries with relatively few competitors and boast strong pricing power - the ability to pass on rising costs to consumers without denting demand too much. A competitive advantage that others struggle to replicate is another trait the managers like.

A long-term investment focus is part of the team’s DNA. They look at what's going on within individual companies, rather than trying to predict the impact of wider economic or political events, which may have little bearing on a company's longer-term success. Fewer changes are made to the portfolio over time as a result. They also invest in a relatively concentrated number of companies, meaning each investment could have a big impact on performance, which increases risk.

Though the managers have made some changes to the portfolio this year. They decided to invest more in Inditex, the parent company of fashion brand Zara, because of its growing strength in the market and quality of its online channel. They also purchased car manufacturer Porsche Automobil. The company recently listed on the stock market and the team believe its brand is strong. They’re also impressed by its efforts in electric vehicles and its growing relationship with Volkswagen.

On the other hand, paint and coating company Azko Nobel, and Epiroc, the manufacturer of mining and infrastructure equipment, were sold. The managers focus on inflation protection and pricing power, but don’t believe Azko Nobel is offering the same level of protection it once did. Epiroc was sold due to its weaker share price and the managers' preference for Sandvik, an engineering company they feel has better prospects.

Roughly three quarters of the portfolio is invested in companies across Germany, France, the Netherlands, and Switzerland. Some of these companies conduct business across the globe which means they're not only dependent on customers in the European countries they're based in.

The managers invest more in some sectors than the index, including industrials, consumer staples and information technology, due to the promising opportunities they find. They’ll pay less attention to sectors composed of companies that don’t have pricing power, such as real estate, energy, and utilities. The financial sector could be included here, but the team have found some opportunities through insurance companies and certain banks including FinecoBank.

Culture

The European franchise of funds is an important one for CT. A number of good-quality managers have come through the ranks within the European equities team, and broadly speaking their funds have performed well over the years.

There have been some changes within the team in recent years though, which is something we're mindful of. That said, we feel progress has been made here, including the way CT incentivises its employees. We’re also pleased to see that the relationship between all three managers appears strong and collaborative. Team changes are something we’ll continue to monitor though.

ESG Integration

CT believes well-managed companies that look to the future are better positioned to navigate the risks and challenges inherent in business. In recent years they’ve developed several proprietary environmental, social and governance (ESG) tools. Our meetings with CT fund managers suggest these tools are relatively well-used by the investment teams. Managers are also generally aligned with the view that an understanding of ESG factors is essential if you want to get a full view of a company’s risk/reward profile.

The firm’s Responsible Investment team carries out analysis on mega trends, carbon, climate change, and many other areas, and research is available for all CT fund managers to access. They are also accessible to fund managers for advice on ESG-related topics and coordinate the firm’s voting and engagement activity. Engagement progress and voting activity is reported in a quarterly Responsible Investment report.

ESG issues form a part of the team’s research and they engage with companies on multiple factors. They believe this is especially important when assessing the sustainability of a company’s competitive advantage and the scope to produce long-term returns. Culture and governance analysis is playing an ever more important role in their process. They believe these factors can have a significant impact on the long-term sustainability of a business, and governance should be at a high standard for a company to make it into the fund.

Cost

This fund is available at an annual ongoing fund charge of 0.65%, after a 0.15% discount available through the HL platform. The charge before the discount is 0.80%. This makes it one of the lowest-cost actively managed funds in the European sector available 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

The fund’s performed well over the long term, returning 140.16% versus the FTSE World ex UK index’s return of 136.88%* over the last ten years. Our analysis suggests this performance has mainly been driven by the managers’ stock-picking ability. They’ve been able to pick companies that have performed well over the long term, regardless of what size they are or which country they’re based in, but remember past performance isn’t a guide to future returns.

Moore became lead manager at the start of 2021 and the performance of the fund has been mixed since then. The fund held up well over parts of 2021, buoyed by several names that responded well to the pandemic and supply chain issues, including semiconductor manufacturer ASML, speciality chemical distributor IMCD and healthcare companies Siemens Healthineers and Novo Nordisk.

But this year has been a difficult period. The fund has underperformed the FTSE World Europe ex UK index by 8.10% over the last 12 months, after facing a number of headwinds. Moore favours a style of investing known as growth, which has been out of favour with investors, and so has detracted from performance. He’s also missed out on the gains made in the energy sector. Spikes in energy prices meant that some energy, utility and oil and gas companies surged ahead. Moore doesn’t invest in these areas.

One thing we like about Moore is despite the fact his process is out of favour with investors and the fund is facing a number of challenges, he remains true to his investment philosophy. He only wants to invest in high quality companies which offer sustainable returns and strong growth potential over the long run. Over this period, healthcare giant Novo Nordisk and insurance company Tryg have been two of the fund's strongest performing companies, demonstrating strong pricing power and robust business models.

Past performance is not a guide to the future. Source: *Lipper IM to 31/10//2022.

Find out more about CT European Select fund including charges

CT European Select Key investor information