The TM Sanditon European Fund launched almost 18 months ago to harness the expertise of Chris Rice, a renowned European equities manager. His long-standing investment process involves forming a view of the wider economic environment and tilting the portfolio towards the types of companies he believes will benefit from the current and next stage of the business cycle.
In his view, we are now approaching the end of the current business cycle (which typically follows economic expansion). However, he feels it's different this time around. Business cycles have historically ended following a strong period of growth for lower-quality, or more economically-sensitive, areas of the market. In the subsequent downturn, defensive sectors tend to hold up better. Yet to him these defensive sectors have already performed well and now look overvalued.
As Chris Rice has generally avoided this type of company, the fund has missed out on some of the gains made. However, he is sticking to his guns in the belief the valuations of these companies are far too expensive and will offer little protection should things take a turn for the worse. Instead, he generally favours more economically-sensitive sectors, which he expects could fare better going forwards.
In effect, the relationship between the stock market and the business cycle is not what the manager has typically come to expect. In recent years, for example, global stock markets have often been affected by wider factors such as quantitative easing, rather than the prospects for individual companies. Chris Rice, however, maintains his process and full flexibility in using his business cycle approach.
The manager currently has a preference for 'consumer cyclicals' - companies sensitive to fluctuations in the economic cycle, which rely on consumer spending for their revenues, such as retailers, automotives and media companies. Current holdings include French multinational public relations company Publicis and Spanish media group Atresmedia.
Elsewhere, Chris Rice has reduced the fund's exposure to financials since launch, believing there is increasing risk within the sector. In particular he suggests many banks are overvalued in comparison with the relatively low levels of cash flow they generate. Other non-bank financials have also been sold from the portfolio, such as insurance group Allianz. Financials currently account for 10.8% of the portfolio compared with around 28% at launch.
Our view on this fund
It has been a difficult time for stock markets across the globe since the fund launched in September 2014. Over this time, the broader European market has returned 1% while the fund has made a small loss of 0.1%*, although this does not act as a guide to how the fund will perform in future.
|Annual percentage growth|
| Feb 11 -
| Feb 12 -
| Feb 13 -
| Feb 14 -
| Feb 15 -
|TM Sanditon European||-||-||-||-||-0.5%|
|FTSE World Europe ex UK||12.3%||23.3%||8.2%||8.5%||-3.6%|
Past performance is not a guide to future returns. Source: Lipper IM to 01/02/2016.
Chris Rice has avoided some of the higher-quality growth stocks that have been in investors' favour and therefore the fund has not been positioned to partake in this rally. Instead, he has focused on areas offering greater value, in his view, which could ultimately bear fruit over the longer term. The fund can also invest in smaller companies which are higher risk than their larger counterparts.
In our view, this fund offers something different to other funds in the sector. The business cycle approach means the fund can, at times, look contrarian in nature and its positioning may not always be rewarded in the shorter term. We are encouraged by the manager’s longer-term track record and his experience in managing European equities, which spans back more than two decades on other funds. The fund currently features on the Wealth 150+ list of our favourite funds with low ongoing management charges.