"The single most important decision in evaluating a business is its pricing power. If you've got the power to raise prices without losing business to a competitor, you’ve got a very good business."
Warren Buffett's quote resounds with David Dudding, manager of the Threadneedle European Select Fund. When looking at a company's level of pricing power, he considers the existence of economic moats. In the Middle Ages, the wider the moat, the harder it was to attack a castle. The same is now true for businesses and companies.
The power of a brand, for example, can act as a moat by protecting against competition and defending long-term profits. Unilever, currently one of the fund's largest holdings, is recognised globally for its range of food and personal care products. Selling more than 400 branded products worldwide, many have become household names and gained loyalty with millions of consumers.
Anheuser-Busch InBev (ABI) is another of the fund's largest and longest-held positions. As the world's largest brewer, the company owns some of the most iconic global brands, including Stella Artois and Budweiser. The company recently launched a takeover bid for rival SABMiller in an attempt to create a global beer powerhouse. While the proposed deal could create some uncertainty in the near term, if successful it could create considerable long-term value.
Many European firms, including Unilever and ABI, are increasingly focusing on expanding, international markets. Their recognisable brands have become extremely valuable assets, allowing them to compete on a global scale. As such, a number of companies held in the fund derive a significant proportion of their earnings from outside Europe, some of which have exposure to emerging markets where demand is rising.
Sentiment towards the emerging world has recently been weak, meaning some of these businesses have struggled in the short term. However, the propensity to consume in the developing world is growing at a rapid pace, helped by growing populations and rising incomes. The manager believes consumer businesses could therefore be well-placed to benefit over the longer-term.
The fund had a good 2015 helped by its bias towards quality companies with sustainable earnings and cash flows. With significant weightings in consumer goods (29.8%) and healthcare (20.1%), the fund benefited from strong returns in these sectors, as did individual stock selection according to our analysis. A lack of exposure to some of Europe's poorest-performing sectors, such as oil, financials and utilities also proved beneficial.
In David Dudding's view, the valuations of some strong-performing areas, such as pharmaceuticals, now look less attractive. However, he believes the high-quality characteristics of his favoured companies should help drive long-term returns.
Longer-term performance has also been impressive. Since David Dudding assumed stewardship of the fund in July 2008, he has delivered outstanding returns of 108.2%* compared with 49.9% for the average fund in the sector, although please remember past performance does not act as a guide to the fund's future returns. Our analysis suggests both strong stock selection and shrewd sector and country allocation has worked in the fund's favour.
|Annual percentage growth|
| Jan 11 -
| Jan 12 -
| Jan 13 -
| Jan 14 -
| Jan 15 -
|IA Europe ex UK||-14.5%||18%||23.3%||0.1%||6.6%|
Past performance is not a guide to future returns. Source Lipper IM* to 04/01/2016.
Our view on this fund
David Dudding has a highly-successful track record in managing European equities. His style, with a focus on quality companies with good growth and earnings prospects, means the fund has tended to perform particularly well in weaker markets. It has also exhibited considerably less volatility than its peers. However, the fund could lag a rapidly rising market or when more economically-sensitive areas of the market return to favour. The fund is also a concentrated portfolio so each stock holding can have a meaningful impact on performance, although this is a higher-risk strategy.
The manager also has the support of an experienced and well-resourced European equities team at Threadneedle. We view the fund as one of the strongest in its sector and it currently features on the Wealth 150+ list of our favourite funds with low ongoing charges.
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