While US companies are generally praised for their quality, strong competitive advantages and high growth prospects, European equities are significantly less popular. Although most fund managers seem to have less faith in European equities, they are generally popular with value and dividend investors.
The popularity of European equities has been waning for years. A decade ago, European equities still accounted for 26 percent of the MSCI World Index, but today that percentage is stuck at 18 percent. European equities have also proved less attractive to more value-oriented investors. The average global large-cap value fund had almost half of its assets invested in European companies in 2012, but this has declined to around 25 percent over the years. Since 2020, however, we have seen a rebound and the allocation to European equities was gradually increased to 32 percent on average at the end of January 2022. This makes funds in the value category an exception, as Europe remains unpopular among large-cap mixed funds.
The European continent has had to overcome many setbacks in the past decade. The European sovereign debt crisis, sky-high unemployment rates in Spain and Greece, Brexit, moderate economic growth and the Italian banking crisis, to name but a few. It explains why investors have preferred stocks outside Europe. Nevertheless, European shares have not completely disappeared from the investors’ radar. Bargain hunters and dividend investors are increasingly turning to European equities.
Overweight on industrials, underweight on tech
With global central banks pushing to halt loose monetary policy, investors are turning their attention to undervalued European companies and cyclical sectors that are more represented in European indices than their US counterparts. For example, the weighting of the industrial sector in the MSCI Europe index is 14 percent versus 6 percent for the S&P 500, while the weighting of technology stocks in the European index, at 7 percent, lags far behind the sector’s 25 percent weighting in the S&P 500.
Dividend investors are attracted by the generous dividend yield that European stocks offer on average versus their US counterparts. With a dividend yield of around 2.7 percent for MSCI Europe, the European income stream is more than 1 percentage point above that for the S&P 500. European companies are more likely to reward shareholders by paying dividends, whereas US companies prefer to buy back shares. This makes American dividends slightly more robust than European ones.
MFS Meridian Contrarian Value
For this week’s top five, the actively managed funds in the Morningstar global large-cap value category are ranked by their portfolio exposure to European equities. The list is topped by a fund whose name suggests it is not shy about contrarian investments: MFS Meridian Contrarian Value. As much as 70 percent of the fund’s assets are invested in European equities.
Since the fund’s inception in 2019, managers Anne Christine Farstad and Zahid Kassam have had a clear preference for European equities, with country-level companies from the UK having the largest weighting at 34 percent as at the end of January 2022, three times more than the average fund in the category. The duo construct a concentrated portfolio of around 40 positions with an emphasis on financial leverage and appropriate undervaluation relative to a stock’s intrinsic value.
The team finds particularly attractive investment opportunities in the industrial sector, including the two largest positions in Sweden’s Trelleborg and Scotland’s Weir Group. France’s Danone also occupies a prominent position, with the team further increasing the overweight in the last quarter after solid figures. Financials are another cornerstone of the portfolio, with positions in UBS, BNP Paribas and CaixaBank, among others.
Schroder ISF Global Sustainable Value
In second place is a fund that has only been in existence since the end of 2021: Schroder ISF Global Sustainable Value. At the helm are Liam Nunn, Robert Barr and Simon Adler. Although the strategy has only existed for a short time, the managers are involved in several other strategies.
For example, Nunn and Adler are part of the Bronze-rated Schroder Global Recovery. In this value fund that integrates sustainability criteria into the investment process, 67 percent of the fund’s assets were invested in European equities at the end of January.
The allocation to equities from the UK, France and Germany is two to four times the weight of the average competitor allocated to these countries. As a result, only 19 percent of fund assets are invested in US equities, compared to almost 50 percent for the average fund in the category. The roughly 40-position portfolio favours stocks with above-average dividend yields and the team also has an eye on companies in the mid- and small-cap segments.
In terms of sector positioning, the penchant for the communications services sector stands out, covering almost a third of the portfolio. Advertising companies WPP and Publicis have a place in the portfolio, but so do television companies ProSiebenSat 1 Media, Television Francaise and ITV. Over 75 percent of portfolio companies have low or negligible ESG risk as measured by the Morningstar Sustainability Rating, giving the fund the maximum five globes.
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