Barings Europe Select: April 2020 fund update

Kate Marshall | Thu 30 April 2020

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• Nick Williams, along with his co-managers, use a strict investment process we think could help drive long-term returns
• Run by a manager with one of the most successful track records in European smaller company investing
• We like his passion for investing, and the way he has integrated others into a collaborative investment team

How it fits in a portfolio

This fund aims to boost long-term growth by focusing on small and medium-sized European companies. This makes it different to most other European funds that focus on larger firms. It could therefore diversify the European part of an investment portfolio, or a broader global portfolio focused on growth. A focus on smaller businesses increases risk and makes a longer investment horizon essential.

Manager

There aren’t many fund managers with such a long and successful track record of investing in this less familiar part of the European stock market. Nick Williams, Head of Small Cap Equities at Barings, is one of the few.

Williams joined Barings in 2004 and took over management of the Europe Select fund shortly after. He also built up 11 years' experience investing in European companies before this at Singer & Friedlander. He initially ran a fund investing in companies of all sizes, including larger ones, so we're confident he's gained superior knowledge of the wider European market over his investing career.

We think Williams' commitment to this fund and his long-standing investment process is hard to fault. It’s a quality we rate highly. He also has the support of co-managers Rosie Simmonds, Colin Riddles and William Cuss. We think these team members have adopted the process well, and together they make a strong team with a good rapport. They can also draw upon the research of Barings' Pan European and other regional teams.

Process

Williams has used the same disciplined investment process for many years. He and his team follow a GARP (Growth at a Reasonable Price) philosophy. This means they look for companies that grow their earnings consistently, but whose shares can be bought at a lower price than the earnings potential suggests they should be. If the managers get their forecasts right and this potential is later recognised by more investors, the share price could rise.

The companies they invest in must be in good financial shape, have low levels of debt, and have the ability to make good profits. Meeting company management is an important part of the process, which is where the help of Williams' co-managers is a real asset, especially as the European smaller companies market is large and diverse. In particular they want companies whose share prices they think can grow by at least 40%. Once a share hits their price target, they either take some profits or sell it in order to move on to the next opportunity

For example, the managers recently sold shares in Puma, the German sportswear company, to lock in profits following strong performance. Shares in Brembo, an Italian manufacturer of disc brakes, were added to the fund as the managers believe the company has strong long-term growth potential from its plans to expand into new markets. They also bought shares in Huhtamaki, a Finnish company that mainly supplies packaging to consumer goods and food-to-go companies, and is growing its business in overseas markets such as India and the US.

Culture

We view Williams as the key manager behind this fund, but we like the fact he's built a robust and collaborative team around him. All team members follow the same process, and they're encouraged to bring challenge and debate to each other's investment ideas, which we think is important. The team are also influential throughout Barings, among other analysts and portfolio managers, which is a reflection of their strength and fund management abilities. Williams also co-manages a few other funds at Barings, but we are comfortable his main focus is on European equities.

We like the fact Williams seems settled at Barings and enjoys working with his team. Equally, we think it’s sensible the group have considered succession planning on this fund to ensure consistency of the investment approach.

The team has integrated environmental, governance and social factors into their work for a number of years. They believe this helps to highlight businesses that use more sustainable practices and could thrive over the long term. It could also uncover risks that are less obvious through more traditional company analysis.

Cost

This fund has an ongoing annual charge of 0.80%, but we've secured HL clients an ongoing saving of 0.10%. This means you pay a net ongoing charge of 0.70% and makes the fund one of the lowest-cost available in the European Smaller Companies sector 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

Williams has built an exceptional long-term track record. He took over Barings Europe Select in 2005 and it's since grown significantly more than its benchmark of smaller European companies, as well as the average fund in the European Smaller Companies peer group. The fund he ran before joining Barings also outperformed the broader market of European companies.

Our analysis shows performance has been boosted by the manager's astute stock-picking ability. This means he's been able to add value no matter what size of company he invests in, and regardless of what sector they're in or country they're based. We think his disciplined investment approach has played a vital role in this.

Over the longer term this fund has tended to hold up better than the broader market when it's fallen. This has happened so far this year amid the market volatility. It hasn't kept up quite as quickly when the market has risen, but this profile has led to good long-term returns so far. As always, past performance isn't a guide to future performance. All funds investing in smaller companies, including this one, can be more volatile, especially compared with those focused on larger, more stable businesses.

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

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