Barings Europe Select: February 2021 fund update

Kate Marshall | Mon 15 February 2021

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• Longstanding fund manager Nick Williams is one of the most experienced European Smaller Companies investors
• He has built a well-resourced team that appears to work well together
• They look for underappreciated growth companies, which our analysis suggests has been achieved to good effect over the longer term
• The 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 aims to deliver long-term capital growth by focusing on European small and medium-sized companies. This differentiates it from many other European funds which tend to focus more on larger companies. This fund could therefore be used to diversify the European element of an investment portfolio, or a broader global portfolio focused on growth. The focus on smaller companies increases risk and the potential for volatility compared with funds focused on larger companies. Investors should therefore have a longer investment horizon.

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 where he was head of the European desk. He therefore has experience of managing funds 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 and collectively the team has over 18 years average investment experience. 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 investment process for many years. He and his team follow a GARP (Growth at a Reasonable Price) philosophy. This means the team looks for companies that grow their earnings steadily, 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 more widely recognised by investors, then the share price could rise.

The companies they invest in must be sufficiently liquid (the ease with which their shares can be bought and sold), in good financial shape, have low levels of debt, and have the ability to make good returns on equity (how well a company can generate returns on the investment made by shareholders). Meeting company management is an important part of the process, which is where the scale of the team resource comes into play. This is especially relevant here as the European smaller companies market is large and diverse with some 2,000 companies fulfilling the team’s criteria.

The team looks for companies whose share prices they believe can rise by at least 40%. Once a share hits their price target, they either take some profits, revise their price target or sell it in order to move on to the next opportunity. Should the share price fall by 20% the team reappraises the investment. These perimeters build in a level of discipline to the investment process that has served investors well and preserved capital to some extent in weaker markets.

During 2020 the number of new investments increased compared with the previous year. In volatile markets, stocks can quickly reach a price the managers are happy to sell, and sales proceeds are then recycled into cheaper opportunities.

Through the year the team took profits in Puma (sporting goods) and Kingspan (insulation). They made new investments in companies likely to benefit from new consumer trends due to lockdowns, such as SmurfitKappa (packaging) and Hellofresh (online meals). Investments were also made in the media sector reflecting the resilience of advertising budgets, particularly for TV and online such as Publicis (advertising) and ProSieben (German TV). Construction companies that benefited from EU stimulus spending such as Wienerberger (bricks) and Rockwool (insulation) were also bought.

By the end of the year the portfolio’s geographic spread had not changed much, whilst exposure to the communication services sector rose, reflecting higher exposure to media and online platforms. In the technology sector exposure to demand for semiconductors increased, while exposure to healthcare declined after taking profits.

Culture

We view Williams as the key manager behind this fund, and currently most of our conviction lies with him. But we are assuaged by 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 reflects 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. Past performance is not a guide to future returns.

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. 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. All funds investing in smaller companies, including this one, can be more volatile, especially compared with those focused on larger, more stable businesses. Our analysis suggests that risk here has historically been used to good effect, i.e. that investors have been compensated for the increased volatility, although this isn’t a guide to how the fund will perform in future.

Over the past 12 months to the end of January 2021 the fund returned 14.4% compared with 18.9%* for the IA European Smaller Companies peer group. The allocation on a country and sector basis detracted as did stock selection over this relatively short period. Specifically, the last few months of 2020 was a tough time as it lagged a strongly performing market. During this period some “lower quality” companies and sectors that are more sensitive to the health of the economy did well, such as financials, where the fund has less invested compared with the benchmark. This fund is biased to what the managers consider higher quality companies (good returns on equity and lower debt) and, whilst underperformance is never a cause for celebration, the reasons behind it and the performance profile are consistent with what we expect.

Our longer-term analysis supports our view that whilst the team may not be able (or seek) to add consistent value through their country or sector positioning, their stock selection more than compensates.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2021.

Find out more about Barings Europe Select including charges

Barings Europe Select Key investor information