Monetary easing, constitutional conflicts and burgeoning trade wars between China and the US have contributed to a climate of macro-economic uncertainty across Europe, to the point that some economists speculate that potentially multiple nations on the continent could be veering towards fresh recessions this year.
Theoretically, this volatility could have the potential to dissuade investors from placing their trust in European markets, however Ben Ritchie remains relaxed about the economic climate and the position of his fund.
Mr Ritchie is head of European Equities at Aberdeen Standard Investments and manages its European Equity Fund, a highly successful, actively-managed equity fund that routinely beats its benchmark, the FTSE World Europe.
A key factor in the European Equity Fund’s success is that rather than predicting or reacting to wide, macro-economic trends, it sticks to identifying and investing in high-quality stocks which result in it having an evergreen appeal to investors.
He says: “That does not mean you can’t have moments in time where the politics and economics changes. But we don’t start out saying: ‘Oh, we think interest rates are going to go up so let’s own some banks.’ We just focus on finding businesses that we can control.”
Outlining his position in more detail, he adds: “We are pretty focused on finding companies where we have a reasonable idea on what their prospects look like today and over a three-to-five-year view. We like to choose companies where we do not see the industry changing significantly, where the prospects are reasonable, and they are not too susceptible to changes in the economic cycle.”
He also recognises that investors want funds to have a clear strategy, arguing that people need to understand how a fund is going to invest on a consistent basis. When commenting on the specific appeal of his fund in a market flooded with established competitors, he reiterates the importance the fund places on quality holdings and offers details of the stringent criteria it applies to every investment it makes.
Mr Ritchie is happy to go into the specifics of the process. He tells fundeye that Aberdeen Standard has a PAN-European team with 40 research analysts in the UK and Europe covering both markets. It has created a pool from its research of approximately 700 companies across Europe, including the UK, with the fund currently selecting 32 of those stocks for its portfolio.
Aberdeen Standard’s research analysts grade every asset on a quality basis, with a one-to-five rating system: with one resembling the best quality, and five representing the least. To ensure the correct grading, the fund assesses each business against key quality factors that provide each stock with an overall score
“We look for businesses with strong, long-term growth prospects and strong business models where we are looking for attractive industries, strong balance sheets, good cash flows, and robust accounting. We also want to find good-quality executive management teams, which are experienced, talented and well-incentivised. Then obviously, ESG is an important factor as well,” he explains.
Commenting on the selection process, he says that the ones and twos, which make up between 10-20 percent of the market, dominate the fund.
“All the companies we own bar one is in that top-quality cohort, so it’s a very focused portfolio, focused on that particular strategy,” he notes.
Turnover targets
Mr Ritchie targets a turnover of 10-20 percent per annum, although it has been higher than that in recent years due to efforts to refocus the strategy, with the fund enduring a difficult period in 2015.
Justifying the greater levels of turnover in recent years, he says: “I was asked by the head of equities at the time to refocus the strategy in the autumn of 2015. It was really about asking ourselves: What are we really all about? We have talked about being quality but let’s make sure we are the best quality company so it’s very clear what we are doing. We want to be the best quality company with an attractive rate of return, a focused portfolio, and essentially put ourselves in a place where we walk the talk.”
Now the fund is tightly focused, and Mr Ritchie expects turnover levels to fit comfortably in the anticipated range over five-year holding periods. This will include an average of two to three new purchases every 12 months, while the rest of it would be “top slicing and topping up.”
Currently 40 percent of the fund consists of its top 10 holdings, which include health care stocks such as Abcam PLC, financials like Deutsche Boerse, and technology holdings such as Amadeus IT Group SA. Mr Ritchie has mixed feelings on the current ratio.
“I think it is possibly light,” he says. “Fund managers do best when they put the most money into companies, they like the most. I would say today we have about 40 percent in our top 10. Ideally, I would like that to be a bit more.”
It is also a well-diversified portfolio with a sector breakdown that also includes industrials, consumer services and basic materials, which help to boost its size to EUR 176.2m. The biggest sector of investment however, is consumer goods, which he calls “steady growers”, and three of its top five holdings coming from this sector, with Mr Ritchie placing his trust in tried and tested established brands. He invests in the Kerry Group PLC, Unilever NV, and Heineken NV - its top holding which makes up 4.9 percent of the portfolio on its own.
Two of the aforementioned companies, Unlever and Heineken are also top holdings in feted investor Nick Train's FInsbury Growth and Income Trust which he recently highlighted in a stock market update. It seems great minds do indeed think alike.
When it comes to the investment it has given to consumer goods, Aberdeen Standard’s head of European Equities is much more certain in his outlook.
Outlining why Heineken appeals to the fund, he emphasises that it is really “dialled into growth” and is highly stable in terms of its demands.
He notes: “It has a very attractive emerging markets footprint, so its major markets include Mexico and Vietnam which are seeing good levels of growth. It has a premium brand which can allow it to add pricing to what it does. Overall, you have got a business growing its revenue organically in mid-single digits, which is relatively respectable in this current environment, and perhaps better than that with the right tailwinds.”
Mr Ritchie also suggests that it has potential for expansion, alongside reasonable balance sheets. These factors have allowed Heineken to make a number of acquisitions that have fuelled earnings growth.
“So, it’s that combination of good predictability, strong balance sheet, good cash flow, and decent growth that makes it quite an attractive combination for us really,” he concludes.
One criticism of the fund could be its price points. Does its current initial charge of five percent followed by an ongoing charge figure of 1.69 percent dissuade potential investors?
He argues: “For a fund where we are aiming to deliver something like a three percent gross, it does not seem like an unreasonable level of split. That ultimately comes down to us delivering performance over time. If we can do that then it is evidence that is relatively reasonable value for money, if we can’t do that, then it is not.”
The problem with buoyant markets
Fundamentally, the European Equity Fund is fairly conservative in its investment approach, which means that when Mr Ritchie discusses potential headwinds for the fund – he points to the problems posed by an overly buoyant market, even if he thinks it is unlikely to be an issue in the short-to-medium term.
He believes that although the fund has profited from “quite a strong market” in the past year, investors come to equity funds looking for specific benefits in specific circumstances.
“Traditionally, if we were just speaking from a blank sheet of paper, we would say ‘Should do well in tough markets, middle markets it would do ok, and in buoyant markets it will probably struggle a bit.’”
He argues that the biggest risk to the strategy of the fund is higher levels of interest rates and inflation, even if he thinks both occurrences are currently unlikely.
“We do have a more expensive portfolio than the market. I suspect if interest rates moved up materially that would have a negative effect on the valuation of the portfolio,” he explains.
He adds: “We are always disciplined, so while we have stocks in high private equities, we will only own those stocks if we believe their implied returns are high above market, but we are prepared to pay a premium for growth.”
As for inflation: “In an environment with a lot more inflation, where effectively there is a lot more nominal growth around, why would you bother paying such a premium? I think you would see a valuation compression on these companies and also at the same time you would see the multiples of a number of sectors that had been quite tough, at the cyclical end of the market like financials, perform quite well.”
Crucially, even if the fund potentially benefits from a gloomier economic climate, Mr Ritchie sees every reason to remain positive about the state of European equities which continue to remain resilient to economic trends across the continent.
He concludes: “We have seen have this very strong equity market rally, we have seen equity markets back at quite close to all-time highs, and equity market valuations that are quite full, and yet economic fundamentals and corporate financial performance are going in the opposite direction.”
Fund details
Fund Name - Aberdeen Standard SICAV I European Equity Fund (LU0094541447)
Fund Size - 176.2m EUR
Ongoing Fee- 1.69 percent
Top Holding - Heineken NV, LSE Group PLC, Unilever NV
Net asset value growth
To read more about this fund click here
