Why a good investment is like picking the right squad

Sam Slator 23/05/22 in Strategy

It’s one of the biggest events on the football calendar. The Champion’s League final takes place on Saturday night, with Liverpool facing Spanish giants Real Madrid.

The annual competition has pitted 32 of Europe’s best teams against each other in group and knockout stages over the past year. And it reaches its pinnacle in a showpiece event at the Stade de France stadium in Paris.

Whether the trophy will spend the next 12 months in Spain or England will depend on the performance of the teams – and the managers at the helm.

Staying in the game

It’s a similar story with investments. Major global events such as the coronavirus pandemic and Russia’s invasion of Ukraine have prompted investors to flee financial markets.

However, it’s important that they stay invested during this period, according to an insight from Brooks Macdonald, whose funds include the SVS Brooks Macdonald Defensive Capital fund.
“Missing the best days during the downturn and subsequent upturn can again have a large impact on the returns generated over the subsequent period,” it stated.

While it’s certainly been a challenging period for investors during 2022, plenty of UK and European companies are still making decent profits. So, if you have a good manager in charge, picking the right stocks, you can still be very successful.

Here we take a look at which stocks are favoured by the managers of both UK and European-focused funds – and highlight the best and worst performers.

Best and worst performers

Novo Nordisk, the Danish healthcare giant, was the largest contributor to the performance of BlackRock’s European Absolute Alpha fund in the financial year to 28th February 2022*.

The company’s launch of Wegovy, a drug targeting weight loss, proved highly successful, according to the fund’s annual report. “Owing to the large addressable market, we believe the launch of this drug could drive strong earnings growth for the business on a multi-year view,” it stated.

The fund, which aims to provide a positive absolute return over any 12-month period, regardless of the market conditions, also highlighted the detractors to returns. Top of this list was the portfolio’s long position in JD Sports, the branded and private label sporting fashion apparel group.

“Whilst the company’s results have beaten market expectations over the period, the fears around a squeeze on both the UK and US consumer, as well as shares sold by the group’s Chairman, detracted from the fund’s returns,” it added.

The Comgest Growth Europe ex-UK fund, which aims for long-term capital appreciation by investing in high quality growth companies, has broad country exposure. The most significant weighting of 20.8% is in France, followed by 15.5% in Switzerland, 14.6% in Ireland, and 14.3% in the Netherlands**. It also has exposure to Denmark, Italy, Spain, Germany, Portugal, and Sweden.

On a stock perspective, Novo Nordisk has the largest weighting of 7.9%**. In a recent update, the managers noted how consumer discretionary and technology stocks have been the worst performers as a result of the environment created by Russia’s invasion of Ukraine.

“Among the top contributors, Heineken rose following strong first quarter sales in which volumes beat expectations despite substantial price increases,” it stated. Meanwhile, ASML, the computer chip giant, was a detractor to performance. “ASML fell despite in line first quarter sales and upgraded 2025 lithography machine expectations,” it added.

Chris Kinder is manager of the Threadneedle UK Extended Alpha fund, which aims to outperform the FTSE All-Share over rolling three-year periods.

The largest position in the portfolio is RELX***, a global provider of information-based analytics tools whose shares are traded on the London, Amsterdam and New York stock exchanges. The company recently announced it had generated pre-tax profits of just over £2bn during 2021, which was up 8% on the previous year’s £1.9bn total.

The second largest position is in Diageo***, the global drinks giant whose brands include Guinness, Baileys, Smirnoff vodka and Captain Morgan rum. Diageo recently reported half year results showing net sales up 15.8% to £8bn, which it attributed to the “continued recovery” in both on-trade and off-trade areas.

Chief executive Ivan Menezes said: “This performance demonstrates our world-class brand building capability, supply chain excellence and agile culture, and reflects the strength of our portfolio across geographies, categories and price tiers.”

AB Dynamics, a specialist in automotive test systems, has been the largest contributor to the TM Tellworth UK Smaller Companies fund**.

In the most recent monthly factsheet, co-managers Paul Marriage, John Warren and James Gerlis also highlight consultancy XPS Pensions Group, and retailer Card Factory. However, the trio highlighted the issues being faced.

“The market remains obsessed with all the really dull wonky macro stuff, it has no desire to look into the detail of company statements and thereby assumes that they are all works of fiction or at least fairy tale plotlines come Q4,” they wrote.

Detractors to recent fund performance have come from Harworth Group, which is one of the largest land and property regeneration companies in the UK. TT Electronics, which manufactures electronic components, and Tyman, which supplies to the door and window industry, also had a negative impact on the portfolio.

*Source: BlackRock, Annual report and audited financial statements, 28 February 2022
**Source: fund factsheet, 30 April 2022
***Source: fund factsheet, 31 March 2022

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.