Barings Europe Select Trust invests in small and medium-sized companies and is run on what is known as a GARP (Growth at a Reasonable Price) basis. The four-strong management team have a detailed and thorough process, looking at both the growth and quality aspects of a company before making a bespoke valuation for each holding based on a five year outlook.
Our opinion
The European small and mid-cap space is under researched and ripe for good stock pickers. This is where this fund comes into its own. It has an experienced four-strong team that produces extensive analysis on the wide range of opportunities. The strategy itself is tilted towards growth companies, but the managers won’t over pay for them. This distinction is achieved using an impressive valuation process that can be customised for each stock.
Company description
The Barings brand has historic roots dating back to the 1700s when it was a London merchant bank. Nowadays, it is part of the Massachutsetts Mutual Life Insurance group (Massmutual) and operates as a global investment management firm. Barings has $354bn of assets under management, services over 1100 clients and employs more than 1900 professionals. It runs a wide array of private and public investment vehicles across a range of asset classes including fixed income, equities, real estate and private credit. Assets are split evenly across Europe & Middle East, the Americas and the Asia Pacific region from offices in 16 different countries.
Fund manager
The fund is run by a team of four co-managers; Nicholas Williams, Colin Riddles, Rosemary Simmonds, William Cuss. Nick is head of the small cap equities team at Barings and also co-manages other strategies. He joined Barings in 2004 from Singer & Friedlander and has managed this fund since 2005. Nick has a BA (Hons) in English Language and Literature from Corpus Christi College, Oxford.
Colin joined Barings in March 2010 from GLG, having had previous roles at HSBC Halbis, Scottish Widows and General Accident. Colin has a BA (Hons) in Financial Studies & Computer Science, an MSc in Investment Analysis from Stirling University and an MBA from Edinburgh Business School. He is a member of the CFA UK.
Rosie joined Barings in September 2010 from Baillie Gifford. She graduated from Oxford University with a degree in Modern History and is a CFA Charterholder. Both Rosie and Colin have been co-managers since 2016.
William Cuss became co-manager in February 2020. He joined Barings in 2016 from Investec and prior to that he worked as an auditor for Ernst & Young, where he qualified as a Chartered Accountant. William holds a BA (Hons) in History and Politics from the University of Warwick and is member of the CFA Institute.
Investment process
Nick and the team employ a growth at reasonable price (GARP) philosophy meaning they look for companies that can continue to grow regardless of the economic backdrop, but won’t pay speculative prices for them. The four-strong team starts by filtering the c.3000 company universe with a liquidity screen for risk purposes. There must be enough trading volume to sell 75% of the holding within 5 days. This leaves c.1600 companies in the investable universe.
The next phase uses some proprietary quant screens developed in collaboration with the wider company, as well as qualitative inputs. The quantitative screens focus on the stocks’ financial criteria, preferring companies with low debt, good returns on the money they invest and good cash generation from operations. This helps score the universe on the GARP metrics the managers prefer.
From here, the most attractive ideas go through in-depth fundamental analysis conducted by the team. The managers will go through a company’s financials, verifying the quant data and creating a five year forecast. They will also do wider analysis around the company, including company meetings (the team do around 250 a year between them), sector/industry analysis and ESG considerations.
This work is categorised in three main areas – growth (historical, near-term and long-term), quality (looking at business franchise, company management and balance sheet strength) and valuation, where each company gets a unique model depending on the risks identified. This gives each company an overall score of 1-5 to allow for a fair comparison before consideration in the final portfolio. Stocks are chosen based on the best opportunities across all of these factors.
The team will also consider a stock’s diversification effect to the existing portfolio and the downside risk it possesses. Position sizes are decided on the stocks’ liquidity and historic volatility to keep the overall portfolio a good balance of reward and risk.
ESG
ESG - Integrated
When considering ESG, the team looks at a whole suite of different factors. The aim is to identify those that will have a material impact on prospective holdings and integrate these risks and opportunities into the analysis. This will involve both significant impact on the financial performance of a company, through to things such as fines, or through a qualitative assessment where a company is likely to cause societal or governance problems. There are also restrictions on a corporate level.
Barings is a signatory to the UN Principles of Responsible Investment and the UN Global Compact, meaning any companies in violation of these are excluded. All analysis is done by managers as part of their fundamental analysis work on their universe. They use the Sustainability Accounting Standard Board for broad sector guidance on issues, but the level of impact is determined by teams in-house. Of particular importance - considering the smaller company focus - is governance. There are over 85 measures in Barings’ engagement system and managers always engage with management of their holdings to ensure best practice is upheld.
Risk
Barings Europe Select Trust will hold around 80-100 names which helps diversify the risks of being toward the smaller end of the capitalisation scale. While being in the smaller companies sector, mid-cap companies are included and the fund will therefore have a larger average cap size than many of its peers. The detailed stock selection process should lead to this being the primary driver of returns. The best outperformance has come in falling markets.
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