Threadneedle European Select: December 2020 fund update

Kate Marshall | Mon 14 December 2020

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• We like this fund as a more conservative option for investing across Europe
• It's run by a 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

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, or perhaps 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 since.

Dudding has a penchant for new challenges, so he also started running a global equity fund in 2013. This fund has become an increasing focus for him, so he’ll step down as co-manager of the European Select fund on 1 January 2021, but will remain a deputy manager.

At this time, Benjamin Moore will be appointed lead manager. He has been co-manager of European Select since April 2019 and part of Threadneedle's European equities team since 2015. Similar to Dudding, he initially analysed European smaller companies, giving him a breadth of knowledge of the market. He also spent time as a European smaller companies equities analyst prior to joining Threadneedle.

Roberta Zeno will also become a deputy manager of the fund. She started at Threadneedle earlier this year and joined the financial services industry in 2008. She has previously worked for Close Brothers Asset Management, S&P and Schroders in roles including equity research.

While we are disappointed to see Dudding take a slight back seat on this fund, we are encouraged he will remain a deputy manager, a position he has confirmed he’ll maintain throughout the remainder of his career at Threadneedle. It means he’ll still have input in this fund and carry out research in European companies, working closely with Moore, Zeno and the rest of the team.

We have met Moore a number of times and view him as a diligent and thoughtful investor. We believe he is well-familiarised with the fund’s existing philosophy and process and, while he has no fund management track record prior to joining Threadneedle, he does have the experience of having learnt from a highly experienced and successful manager in Dudding. We are pleased the two will continue to work together.

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 spend their time looking for quality companies. These are businesses with a sustainable competitive advantage, which could help them sustain long-term cash flows. They should possess a unique quality the managers think can help them maintain higher earnings than the rest of the market thinks they can. This might be because they make a product that others can't replicate, are better at keeping costs down, or have built strong relationships with their customers meaning they're less likely to switch to a competitor.

The team focus 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, which could bring some more stability to the fund than some other European funds.

While the fund typically focuses on more “defensive” companies, the managers have reduced exposure to the consumer goods sector this year. Company profits have improved significantly in recent years, and the fund has benefited from this, but the managers no longer see as much potential in this area and in some cases have moved on to what they believe to be better opportunities. Companies sold from the fund this year include Unilever and drinks company Pernod Ricard.

On the other hand, the managers have added to technology-related businesses, including Worldline, a French credit card processing and payment services company, and SAP, a German software solutions business.

Overall the fund invests in a fairly small number of companies, currently 41, 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. That said, we feel progress has been made here, including the way Threadneedle incentivises its employees. Dudding and Moore appear to get on well working at the group, with a good dynamic between the two of them, and a good relationship with the wider team. The managers have also been given the opportunity to progress and take on new challenges over the years. 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.

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 charge 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 117.7%* over his tenure. As always past performance isn’t a guide to future returns.

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

Moore has a shorter track record, though the results looks promising since he became co-manager in April 2019, and while he previously worked in the European smaller companies team.

The fund has had a particularly strong year, helped by a focus on companies expected to deliver sustainable earnings growth. Swiss biotechnology firm Lonza and German chemical and ingredients distributor Brenntag have been some of the top performers. Newer holding Worldline has also performed well so far.

Moore and 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, but there are no guarantees the fund will perform this way in future. All investments fall as well as rise in value, so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2020.

Find out more about Threadneedle European Select fund including charges

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