384. European investing with a risk-aware edge

19 February 2026 (pre-recorded 29 January 2026)

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[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. We head over to Europe today and highlight the importance of patience, consistency and focusing on quality companies that deliver sustainable dividends.

Chris Salih (CS): I’m Chris Salih and today I’m joined by Marcel Stotzel, co-manager of the Elite Rated Fidelity European Trust. Marcel, thank you very much for joining us today.

Marcel Stotzel (MS): No worries. Thanks for having me ,Chris, great to be here.

[INTERVIEW]

CS: No problem. So this trust has been recently rated by FundCalibre. So for our listeners, I think it would be good to start with a bit of an introduction. So you’ve described the trust in me before as a portfolio that sort of manages in a risk averse way, but with that focus on quality, maybe let’s just put that into practice and explain that, put a bit more meat on the bones of that, please.

MS: Yeah, sure. So what we are really trying to do underneath it all is we are trying to deliver, you know, 1% to 2% performance post fees per annum relative to the benchmark over a relatively consistent timeframe. You know, we’ll have good years and bad years like everybody else, but over three to five years, that’s our goal. And within that, as you touched on downside protection is something that’s quite important for us. You know, the last thing we ever want is to be saying, you know, the market is down 10%, we down 20%, you know, we’re sorry, we called A, B and C wrong. That preservation of capital, is really vital for us.

And what we do in practice with all of those kind of philosophies is we try to look for companies that consistently grow their dividends year in, year out. And the simple reason that we do that is because we’ve sliced and diced the data a million which ways, and companies that consistently grow their dividends tend to outperform the market. And if you look at Europe over the last 1, 3, 5 years, that’s been the case. And if you went back further, that would be the case too.

So companies that consistently out grow their dividends outperform. And a big part of being able to consistently grow your dividend is to have quality characteristics. So we don’t love quality for quality’s sake. You know, I walk on the street and there’s a £20 note, I’ll pick it up and I won’t walk past it. But for us, the quality enables us to have that conviction that the company’s going to be able to grow its dividends for the next five years. Things like strong balance sheet, high return, structural growth, all of these quality attributes.

CS: If I remember rightly – and you’ve touched on the dividend there – you have a chart, which you showed me, which shows that there’s a certain amount of companies that pay dividends in Europe, but those companies that paid in the past may not necessarily be the ones in the future. So you’ve got to find the new ones with the pathway to dividends as well.

MS: Exactly. So there were 74 companies over the last four of the 74 of the kind of MECI Europe companies that grew their dividends each year for the last five years. And one thing I know for sure is it’s not gonna be the same 74 companies over the next five years. You know, things change, things go wrong. Markets change, everything changes over a five year period. So really we have a bunch of attributes that we look at to try and identify which are those companies that we think are going to grow their dividends year in, year out for the next five years. And I touched on some of them, strong cash conversion would be another one. Just really kind of strong management team too, et cetera. It’s all feeds into a model that then informs our opinion that our view that this stock will grow its dividend for the next five years.

CS: Okay. we should talk about the obvious news that happened last year that finally concluded last year in terms of the merger with the Henderson European Trust. There’s a lot of that sort of activity going on in the industry at the moment. Maybe just explain the thoughts behind that and importantly what the benefits are to investors in the current vehicle.

MS: Yeah, so I’ll start with what the benefits are first, because that was obviously at the forefront of our mind. So two main benefits or three main benefits should I say for our investors. So firstly, and probably the one that most investors will notice firstly, is because of the biggest scale, you know, and we brought on £400 million of extra assets as part of the deal, we’ve lowered up fees on the trust, so that’s gonna flow straight into the pockets of existing shareholders.

We’ve also done a fee waiver for new shareholders coming on as part of Henderson. So, you know, directly allowing our shareholders to benefit, you know, almost one to one, if not more than one to one from, from that biggest scale, that biggest scale also breeds better liquidity, you know, with the biggest European trust in the market. And that means, you know, easier to trade out of lower transaction fees, et cetera.

And then lastly, we also brought on two directors from Henderson Vicki and Rutger who have been great additions to the team. And you know, Vicki’s, a former fund manager, will basically just help us to further even strengthen what was already a very strong board.

The other thing I would say about that is it was a very pleasing process from our point of view in terms of, you know, as you can imagine, when two publicly listed companies come together, the due diligence is off the charts. And I don’t just mean due diligence in terms of dotting i’s and crossing t’s, but really for them it was very important that they believed in our process, believed in our philosophy, believed in our long-term ability to outperform going forward as we have done in the past. So, you know, that was for us a really nice vote of confidence.

CS: And just to be clear before we move on, no changes to the process at all. You’ve just brought in and, you know, the same number of holdings, same process, nothing changes on that front.

MS: Exactly. Nothing changes, we obviously did kick the tires of the portfolio that we were bringing in because you don’t want to sell something only to have to buy it later. But actually we didn’t even bring in one or two of, we had some holdings that we both shared, but of the holdings that we didn’t share, we didn’t bring in any of those new ones because we just didn’t feel like they were better than what we had in our opinion. So no, in terms of even the holdings, nothing’s changed in terms of the process, philosophy, style, definitely nothing changes.

CS: We’ve had an environment of higher rates, which we are sort of just coming out the other side of, and we’ve had factor rotations and there’s been a few headwinds for these high quality, stable growing sort of, you know, the exact type of company that you look to invest in. I assume that in that environment you’ve been going, there’s opportunities here we need to take advantage of. How have you been going about that?

MS: Yeah, so it was a tough year for us. Last year was probably the toughest year we’ve had in 15 years. And you know, that’s not a coincidence that it happened at the same time as what you said, some of the factor rotation moves. There were some kind of stock picking areas that we had too. But I think a big chunk of it is that quality growth names have been kind of more than just on sale, they’ve been on a fire sale or bargains on a bargain sale.

So firstly, there have definitely been a few names that we’ve picked up that we think are very attractive entry points. Mont was one Inditex was another, you know, Inditex we’d be looking at for five years waiting to get a good entry point. And we think we now finally got one. But for the rest, actually, it’s very interesting.

So if you strip out the impact of leverage — and I know leverage a very important part of our trust, so I don’t want to dismiss that — but if you strip out leverage and just look it on a like basis, the dividend yield of the fund would be more or less on the dividend yield of the market. So, the same price for the fund as the price for the market. And that’s pretty much never been the case over the 15 years that we’ve been running it, you know, which makes sense because we have faster dividend growth, we have higher returns, i.e. higher quality, and if we’re doing our job correctly, we have more sustainable dividend growth. And usually the market charges us between 5% and 15% privilege for that. So i.e. our dividend yield will be below 5% and 15% lower than the market. But now for, like I said, pretty much the first time ever, you’re getting it for the same price as the market.

So to answer your question, we are definitely looking for opportunities, but in a way, we feel that some of the best opportunities actually the holdings that we have given that our fund gives you faster growth, higher returns, more sustainable growth than the market for the same dividend yield as the market.

CS: Okay. And I was going to ask this a bit later, but I feel like we should talk about valuations in European equities at the moment. Obviously last year was a good year for the market. [MS: Yes.] And valuations are high versus their own history, but something read between the lines and say there’s still plenty of opportunities there.

MS: So I think it depends with what lens you look at it through, right. So if we are looking at it purely from an absolute point of view, i.e. you know our valuation levels high, I think it’s hard to argue that they aren’t, you know, I mean, European valuation levels are kind of 80 percentile, so like the top 80% highest that they’ve been. There’s a few things though that make me caveat that answer. And some of them are more satisfactory and some of them are less satisfactory.

But the first one is the US is at a hundred percent and the US is still at a very big premium relative to Europe. And some of that may be justified, you know, by bigger weightings to tech and others. But a large part of what’s built up the US is perhaps not going to be the same over the next 10 years as it was over the last 10 years. The fiscal debt spending being a key case in point, you know, I don’t think us can increase their debt spending as much over the next 10 years as they have over the last Europe, on the other hand, can in many instances, you know, you’ve seen Germany lift the fiscal hand break, you’ve seen Belgium and the Netherlands and some of the other kind of scandy countries look kind of, you know, with still quite a lot of room to go in terms of spending.

So while we are cautious in terms of absolute levels, we think relative to the US, Europe looks attractive. And also even Europe relative to its own history may not be the best kind of guide. I mean, we have, you know, we’ve seen things that I never thought would happen. We’ve seen defense spending go up a lot. We’ve seen like I touched on the fiscal debt break being lifted. You know, maybe just maybe we might see tighter Europe by integration like the drug euro port, we might see red tape being cut, bureaucracy being cut.

Lastly, one of the things that Europe is very keen on is mobilising their savings rate. Europeans save more than Americans, but invested in the wrong way, i.e. in fixed deposits, life insurance products under the mattress, all that kind of stuff, you know, as Americans put it to work in equity so it can be recycled back into the economy. So I think there’s reasons to believe that we have reasons to believe and we in many ways, more bullish on domestic Europe than we have been in in some time.

CS: Well, that was gonna be the next question in terms of domestic Europe. And maybe let’s touch on that now. Yeah, maybe just give us a couple of really good examples that stand out because the argument has been previously, was it two thirds of revenues come from outside of Europe, so ignore the fact Europe trouble because outside of Europe now it seems to be the other way round. And maybe just tell, talk us through that.

MS: I think firstly it’s important to state that the two thirds is still there and it’s still going well, you know, so I call this a three engine airplane, if you’ll run with me on the metaphor. For the last 15 years, you touched on it, know only two of the three engines have been working. And that’s the kind of two thirds that’s outside Europe of the MSCI Europe. And the one third has been splattering around, but it’s been okay because the two thirds has been working so well that the overall PIs has still, you know, MSCI Europe has still grown decently over the last 20-30 years. But now for the first time, imagine if you could have the third engine working too, because the other two are still broadly working.

Tariffs and a few other things, not withstanding. You know, SAP and Roche and L’Oréal and ASML are still doing fantastic sales outside of Europe and that hasn’t changed and we don’t think that’s gonna change. But imagine if the final third engine got switched on too, you know, that that plane will go even faster. And that’s what we think, all of the things I touched on, right? So the test spending, you know, the savings being mobilised, the tied to integration.

To be clear, Europe has a way of grasping defeat from the jaws of victory. So I’m not gonna sit here and tell you I have a 100% confidence that all of those are gonna happen, but the fact that two of the five that I never thought would happen, i.e. defense spending going up a lot and Germany lift the fiscal debt break to me means that the other three certainly have a higher probability than ever of happening. And that would mean, you know, closing the GDP growth gap with the US closing all kinds of things. And meaning that maybe elevated multiples are justified.

CS: Okay. Is that leaning towards certain sectors and certain stocks?

MS: Yeah, definitely. So we touched on Inditex, obviously you know, retail will be a direct beneficiary. Inditex very domestic. Ryanair was one that we bought about a year ago. You know, flights travel is very sensitive to GDP and Ryanair obviously also skews more towards the mid to low-end consumer, which will  spend more on travel if kind of posts allow. And that’s actually what we’ve already seen, you know of the last kind of few months.

And the last one I would say is European banks, I mean banks, you know, European banks are the best performing sector besides defense over the last two to three years. And we still think that’s got more to run because if economies do well, you know, people will take more loans. All of these new kind of fiscal spending stuff needs to be financed with borrowings in some instances, with government debt, with corporate debt, with all of these kind of things.

And just to put it in context, European loan growth over the last decade or so has been roughly flat. I mean, think about that, right? Zero loan growth, and that’s because a large part because the economy was stuck, but also a large part because these banks were cleaning themselves up, right? Fixing their balance sheets, getting themselves in better shape, they’re now in better shape. And I’m not saying we’re going to 5% loan growth, but if you go from zero to 2%, that makes a massive difference to what investors are willing to pay for your stock, how you can run your business, all of those kind of things. So yeah, I’d highlight those three.

CS: Okay. And just quickly to turn back to the sort of the first two engines, let’s put it that way. What is the benefit of that leverage on a hundred? Was it 135 analysts globally rather than just European analysts? How useful is that in terms of standing out from your peers?

MS: Yeah, extremely. I mean, we couldn’t do what we do without them, to put it frankly. So we have around 35 analysts that cover Europe. And obviously we speak to those, you know, more frequently than the ones that cover non-European sectors or stocks. But, as you touched on, two thirds of our company’s revenues come from outside Europe. So if I look at a stock like ASML, for example, you know, ASML’s top three customers are Samsung, TSMC and Intel, you know, so we speak a lot to our Taiwanese analysts on what TSMC are doing to Korean analyst on what Samsung is doing, and to our US semis analyst on what Intel is doing, you know, and that’s a very big kind of, you know, a hundred billion market cap that I’m sure everybody, you know, would have somebody covering.

But it goes all the way down to, you know, might have, there might be a very important customer that’s only a few billion market cap and having that ability to speak to the analyst on those stocks, bounce their ideas, speak to management also is a big one. I mean, people sometimes people sometimes say, oh, you know, management meetings are not worth anything anymore because companies cannot tell you material non-public information. And that’s obviously true, they cannot, but some of the most interesting nuggets I’ve found are when you speak to the management teams of a big customer, a big supplier, a big competitor, a big kind of, you know whatever player in the value chain, that’s when you really get some interesting nuggets. Not necessarily on the company themselves, because they’ll always tell you their own company’s going great, but you know, a company will not hesitate to tell you what’s going wrong with a competitor if you ask it kind of in the right way.

CS: I want finish with just back to where we started on that risk averse nature. Do you have a sort of way of managing that from a sector perspective in terms of not being too under overexpose? And then to follow that up, we’ve gone, what, 15 odd minutes into this podcast without mentioning AI, we have to mention it. How do you go about approaching that sector with that risk averse hat on, you know, you mentioned as ASML, how’d you go about that? There’s a lot of froth in that market at the moment. You must be worried, but by the same token, you don’t wanna avoid it.

MS: Yeah, it’s a great question. So I’ll start with the first one. So yeah, I should have mentioned when we’re talking about the risk averse nature, we make sure that we have plus or minus 5% weightings to each of the sectors. So each of the big sectors, so like plus or minus 5% to healthcare, industrials, financials, tech, whatever versus your benchmark and just versus our benchmark. And just that discipline of having, you know, for example, having energy when the Russians invaded Ukraine, you know, meant that we didn’t get carried out on a stretcher, you know, having banks, I mean, we like banks, we probably would’ve had it anyway, but just having that forced discipline to have banks meant that, banks having three good years in a row means we don’t get carried out on a stretcher kind of thing. We don’t need to have all of the sub-sectors. So for example, you know, consumer discretionary subset is autos. We don’t need to have autos, which we don’t. But just having something in those big buckets definitely does help.

AI is a fantastic question. I am very much of the view that I can see both sides of the coin. I can see a world class tech, world changing should I say, new technology here that could be on par with the internet in terms of the kind of impact that it has on society. But on the other hand, I can see a massive capital cycle building at some point in terms of, you know,, there are some kind of booms that just keep on booming, you know, smartphones being one of them. That’s off the top of my head. There was never a bust in smartphones, cloud computing being another one that just kind of boomed and boomed and boomed without ever slowing, without ever having a burst. But obviously, you know, the majority of of booms do end up having at least a mini burst at some point in time because you build up too much capital.

So, you know, trading off the two of them for us means that we want to have, which we do have more or less an inline position in the market to overall AI exposure, but we want to do it in a very selective and surgical way such that, you know, we are not in the kind of frothier more expensive parts, you know, and ASML you touched on, it’s interesting. I mean, ASML when we were making it a big position six, 12 months ago, you know, was left in the woods, right? People thought of it as an AI loser. And as a result, we’ve been trimming ASML kind of,as it’s done better and better and better.

But there are other names. You know, you look at the likes of Schneider LaGrand that sell in, into data centres that sell kind of, you know switches, transformers, uninterrupted power supply, all of the kind of electrical equipment that’s needed in data centres that are not trading that far away from their long-term multiples despite the fact that growth is materially higher. So we do think there are, you know, parts of the market where you can still find AI value. Even though we wouldn’t want to be going all in on those parts of the markets, given we are still somewhat conflicted here.

CS: Okay. Just quickly before we round up is one of the biggest challenges managing the trust, the ability to, that those sort of, that focus on risk management to trim the winners, to avoid going too heavily into a certain sector or stock. I’m guessing you have to pull them back when you really don’t want to because you can see more growth, but you have to, it’s the scope of the portfolio.

MS: It is, and it doesn’t feel great. But to be honest, it’s been a massive contributor, I would say over time to performance. So the fact that we have been trimming ASML, the fact that we were trimming in the past LVMH, Novo Nordisk, all of those, despite the fact that they looked, at their peak, when the share price was at its peak, everything obviously looks rosy. But you know, kind of that’s the point in time when obviously you should be considering that maybe there’s a lot baked into the price. So we actually like, in a way that forced discipline, it’s a bit like being tied to the mast kind of thing. It doesn’t feel great when you’re tied to the mast, but it’s a good mast to be tied to it. It’s a good discipline to have never to let one sector become too big, never to let one stock become too big. Because even if we have very strong conviction, we get things wrong from time to time and we don’t want to have one single sector call, for example, to be determining the performance of our trust.

CS: Like a polite tap on the shoulder telling it’s time to go home sort of thing. Isn’t it really?

MS: Yeah. Well maybe you don’t need to go home, but you know, you need to drink a glass of water in between kind of thing. Right?

CS: On that note, thank you very much for joining us today, Marcel.

MS: Thanks a lot for having me, Chris. Great to chat with you.

SW: Fidelity European Trust is a core European equity portfolio with a disciplined and cautious long-term focus. Although not an income fund, the team wants companies which can sustainably grow their dividends over time. For more information on the Fidelity European Trust please visit fundcalibre.com