Threadneedle European Select: April 2020 fund update

Kate Marshall | Wed 29 April 2020

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• We like this fund as a way to invest more conservatively across Europe
• It's run by a manager with lots of knowledge and experience of investing in European companies
• We think a focus on companies expected to deliver more sustainable returns could help drive performance over the long term

How it fits in a portfolio

This fund mainly invests in big firms in larger or more stable European economies, such as Switzerland, France, Germany and the Netherlands. We view it as a good all-round choice in this sector, either as a first European fund, or to sit alongside other European funds using different investment styles. It could also form part of a broader global investment portfolio focused on long-term growth.

Manager

David Dudding has a wide-reaching knowledge of European markets. He joined Threadneedle as a research analyst in 1999 and later took over Threadneedle European Smaller Companies in 2002, which he ran for over a decade. In 2008 he was given the chance to cut his teeth on Threadneedle's flagship European product – the European Select Fund – which he's managed ever since. Dudding has a penchant for new challenges, so he also started running a global equity fund in 2013.

Benjamin Moore has co-managed European Select since April 2019 and been part of Threadneedle's European equities team since 2015. Similar to Dudding, he initially analysed European smaller companies, given him a breadth of knowledge of the market.

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

Dudding and his team spend their time looking for quality companies. These are businesses with a sustainable competitive advantage, which is essentially a unique quality the team thinks can help the business maintain higher earnings than the rest of the market thinks it can. This might be because the business makes a product that others can't replicate, is better at keeping costs down, or has built strong relationships with its customers meaning they're less likely to switch to a competitor.

The team focuses on what's going on within individual companies, rather than trying to predict the impact of wider economic or political events that may have little bearing on a company's longer-term success. They also tend to focus on larger firms that could bring some more stability to the fund than many other European funds.

At the moment the fund has a bias towards consumer-related and technology companies, and the managers tend to invest less in sectors that are more sensitive to the health of the economy, such as financials and oil & gas. The fund invests in a fairly small number of companies and this means each one could have a big impact on performance, though this approach increases risk.

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. We also think Threadneedle has needed to make some improvements to how it incentivises employees. That said, we feel progress is being made and Dudding appears content with working at the group. He gets on well with his team and is given the opportunity to take on new challenges. He is also a solid mentor for younger manager Benjamin Moore and we feel there is a good dynamic between the two managers.

We expect Dudding will eventually pass the fund's reins over to Moore, and this is something we'll monitor. For now we think he is dedicated to ensuring the fund is in good shape and Moore is up to speed with the investment process.

Cost

This fund is available at an annual ongoing fund charge of 0.68%, after a 0.15% discount available through the HL platform. 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

Dudding has a long history of outperforming the European stock market. The European Smaller Companies fund he ran from 2002 to 2012 performed better than the broader market of small European firms. European Select has also outperformed its benchmark, the FTSE World Europe ex UK Index, by 106.7%* over the manager's tenure.

Our analysis suggests this is mainly down to the manager's stock-picking – his ability to identify stocks that go on to perform well, regardless of what size they are or in which country they're based. Being in the right sectors at the right time has also helped.

Dudding's more conservative approach and focus on companies that could deliver more sustainable returns has seen the fund perform well in a variety of market conditions. It's held up better than the average European fund in weaker markets, though it hasn’t tended to rise as quickly in positive markets. It has also tended to be one of the least volatile funds in the European sector. Please remember past performance isn't a guide to future returns.

We've seen the fund perform this way so far this year. Avoiding some of the worst-performing sectors, such as banks, energy, travel, and leisure has helped it hold up well. In particular, avoiding airline, restaurant and hotel companies, as well as retailers that have been less effective at moving their business online. Individual companies that have held up better include biotechnology firm Lonza and pharmaceutical company Novo Nordisk.

Past performance is not a guide to the future. *Source: Lipper IM to 31/03/2020.

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