Threadneedle European Select: November 2021 update

• Benjamin Moore took over from David Dudding as lead manager of the fund earlier this year
• The fund is backed by an experienced team with plenty of knowledge and experience of investing in European companies
• We think a focus on sustainable returns could help drive performance over the long term
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Threadneedle 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.

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 Threadneedle's 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 Threadneedle 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 deputy manager of the fund after stepping back as lead manager at the start of this year. Given his experience and success on this fund, we’re encouraged he’ll remain involved as deputy manager throughout the remainder of his career at Threadneedle. He’s also lead manager of the Threadneedle 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 daily, where they continue to share ideas and discuss market trends.

The managers are also supported by a well-resourced European equities team at Threadneedle. This group of analysts act as an important source of ideas for the managers and helps to encourage challenge and debate in the team.

Process

The managers look for high quality companies they believe offer sustainable returns and strong growth potential over the long run. These businesses typically possess unique qualities and a competitive advantage that others struggle to replicate.

They focus on 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. The focus they place on larger firms, could also help bring some more stability to the fund compared to some other European funds.

The fund invests in companies all over Europe but almost three quarters is invested across Germany, France, the Netherlands, and Switzerland. It typically invests in fewer than 50 companies so the fund is fairly concentrated, which means each investment could have a big impact on performance, though this approach increases risk.

Last year the managers took advantage of market volatility to invest in certain companies at a more attractive share price. Profits were taken from those that performed well. Overall, there’s been less activity so far in 2021, but the managers have still unearthed a few new ideas. Recent investments include FinecoBank. The managers believe it has a strong business model as a distributer of investment funds and other financial services via a leading Italian online platform. They also added to their investment in French luxury goods maker LVMH.

Culture

The European franchise of funds is an important one for Threadneedle. 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 Threadneedle 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 (Environmental, Social and Governance) 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.

We recently spoke with the fund managers and they noted their increasing focus on companies’ culture and governance. 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. Over the last 10 years it’s returned 264.20%*, versus the FTSE World Europe ex UK’s return of 196.06%. 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.

The fund’s also performed well since Moore became lead manager at the start of 2021, though this is over a short time period. Semiconductor manufacturer ASML was among the fund’s top performers over that time. The pandemic accelerated the trend towards digitisation which helped fuel demand for semiconductors.

Chemical distributor IMCD and fashion retailer Inditex were also among the top performers. IMCD released a strong set of results, boosted by increased demand this year, whereas Inditex, saw a recovery in both physical store and online sales.

Although the fund has had a strong year so far, it’s slightly underperformed the FTSE World Europe ex UK index. This is because of the fund’s lack of exposure to some of the lowlier valued and more economically sensitive areas of the market, such as energy and banks, which performed strongly in the first part of the year.

Instead the managers focus on companies they believe have more sustainable growth prospects, which could also provide an element of shelter when markets go through a tougher time.

Some of the fund’s investments took a hit too though. Payment processor Worldline was a weaker performer and has been up against increasing amounts of competition in the online payment space. Auto manufacturer Knorr-Bremse also performed poorly and has since been sold from the portfolio.

Past performance is not a guide to the future. Source: *Lipper IM to 31/10/2021.

Find out more about Threadneedle European Select fund including charges

Threadneedle European Select Key investor information