2024 marks a fateful time for European equity markets. This year, the weight of European stocks in the Morningstar Global TME index (MSGTMETU) – a global equity index encompassing developed and emerging markets – has fallen to an all-time low at 16.2%. That's roughly half its weight 15 years ago. The only European listed company now left in the Global index's top 20 holdings is Novo Nordisk (NOVO). There were five in 2009.
Worse, the return gap between the US and the European stock markets is staggering. As of end-July 2024, there's a 8.4% gap in 10-year annualised performance (in euros) between the Morningstar Developed Europe TME NR index and the Morningstar US Large NR index. A large part of that differential comes down to the roaring performance of the mega-cap US technology stocks in recent years. European investors themselves are losing steam and fleeing their home market. In aggregate, European-domiciled funds and ETFs invested across Europe's equity markets have been in net outflows since 2018, every single year.
This dreadful picture makes it hard to argue for the asset class. But it's not as bleak as it sounds. Europe is still home to some of the best quality companies in the world – if one excludes the technology sector – often priced at much cheaper valuations than their US counterparts. These opportunities are not lost on astute fund managers.
Some of the highly rated global equity strategies that we cover – GuardCap Global Equity, Dodge & Cox Worldwide Global Stock, Capital Group New Perspective or MFS Meridian Global Equity to name just a few – carry oversized exposure to Europe. Beyond the contrarian and valuation arguments, Europe equity also shields domestic investors from adverse currency movements. So, there are a few solid reasons for European investors to allocate to their home market in a portfolio allocation.
Luckily there are plenty of ways to tap into the European equity market. Low-cost funds and ETFs are good options, especially for investors not able to access active management at reasonable costs. But Europe is also a fertile ground for skilled active managers. Our research team covers strategies with different styles in this universe that can be combined to construct a diversified portfolio. There's a common thread though: our preferred managers know the market extremely well and have the persistence for their high conviction to bear fruits. We list below five of our top convictions to invest actively in Europe equities.
Brandes European Value
Deep-value investing skillfully executed
• Morningstar Medalist Rating: Gold (on the I EUR share class)
• Morningstar People Pillar Rating: High
• Morningstar Process Pillar Rating: Above Average
• Morningstar Parent Pillar Rating: Above Average
• Morningstar Star Rating: ★★★★★
• Fund Size: €527 million
• Morningstar Category: Europe Large-Cap Value Equity
Within the value camp, Brandes European Value is one of the best active funds in the market. The strategy is run by a seasoned team of value-oriented investors. A stable five-person committee makes investment decisions collectively. Each team member brings a wealth of experience to the table, and they are backed by a solid team of 22 fund managers and analysts to perform stock research, across the market cap spectrum.
Another strength here is the fund's distinctive strategy, characterised by its minimal regard for benchmarks, patience and a greater allocation to under-researched small- and mid-cap stocks. They are willing to go to abandoned corners of the market to find investment opportunities. Their deep-value approach is risky though and may not suit every investor. However, those with a long-term perspective and tolerance for risk will find that this fund could be a great addition to their portfolio, especially if it currently leans towards growth stocks.
Magallanes V.I. UCITS European Equity
A hidden gem
• Morningstar Medalist Rating: Silver (on the P EUR share class)
• Morningstar People Pillar Rating: Above Average
• Morningstar Process Pillar Rating: High
• Morningstar Parent Pillar Rating: Above Average
• Morningstar Star Rating: ★★★★★
• Fund Size: €963 million
• Morningstar Category: Europe Flex-Cap Equity
Magallanes European Equity is probably the lesser-known name in this selection. Yet this value strategy benefits from a focused team, a talented lead manager, and a highly repeatable and distinctive investment process. Iván Martín is a veteran investor who built a successful career running Iberian equity portfolios for around 15 years before setting up the investment boutique Magallanes in 2014. He has built a small team of three roving analysts and one trader who closely support him in running the firm's three strategies, where they apply the same value-centric investment philosophy.
The team invests with a long-term mindset across the market-cap spectrum. Valuations are paramount here: once an idea is identified, the team performs thorough fundamental due diligence on a business to estimate its intrinsic value. Martín seeks financially sound, well-run, high-free-cash-flow-generating companies that he believes are misunderstood by the market while avoiding complex, overleveraged, unproven, or hyped firms. The portfolio is typically concentrated on around 30 companies, and large deviations in terms of style, size, and industry allocation relative to the index and peers are common. There's little room for stock picking mistakes and the strategy sports meaningful risks. But patient and risk-tolerant investors should fare well. The strategy has delivered outstanding results relative to peers and its benchmark since inception, all the more impressive given the underperformance of the value factor in the last decade.
BGF European Fund
A top-notch team playing to its strengths
• Morningstar Medalist Rating: Silver (on the D2 EUR share class)
• Morningstar People Pillar Rating: High
• Morningstar Process Pillar Rating: Above Average
• Morningstar Parent Pillar Rating: Above Average
• Morningstar Star Rating: ★★★
• Fund Size: €1.5 billion
• Morningstar Category: Europe Large-Cap Growth Equity
BlackRock's European equity desk went through a period of instability from 2017 to 2019 but we believe it is now back to full strength. The team manages strategies with different styles from Growth to Value. BGF European sits at the growth end of their fund range although it is not a pure play on growth stocks with room for opportunistic value bets, at times. Its lead manager, Stefan Gries, is a capable and very knowledgeable portfolio manager. He is well supported by BlackRock's 20-plus fundamental European equity team which is one of the best-resourced and highest-quality in this market segment.
The team's stock research drives Gries' search for companies that score well on quality of management, investment in growth and return on capital. The approach is implemented with conviction, as reflected by the portfolio's high top-10 concentration and Gries' willingness to make bold moves, translating into dynamic sector allocations. Under his watch, the fund has achieved commendable results, even after accounting for the higher risks sported by this approach. Investors seeking exposure to Europe ex-UK stocks can look at BGF Continental Europe Flex, run by Gries' teammate Giles Rothbarth. We hold an equally high view on this strategy, run in a similar fashion.
Comgest Growth Europe
The quality-growth experts
• Morningstar Medalist Rating: Silver (on the Z EUR share class)
• Morningstar People Pillar Rating: High
• Morningstar Process Pillar Rating: High
• Morningstar Parent Pillar Rating: Above Average
• Morningstar Star Rating: ★★★★★
• Fund Size: €6.3 billion
• Morningstar Category: Europe Large-Cap Growth Equity
Investors looking for a purer growth approach than BGF European can look no further than Comgest Growth Europe. Very few can match the expertise that this team has built in the European equity market over time. The six most experienced team members oversee investment decisions across the firm's European large-cap fund range, yet all ten members contribute to stock research. They all share a strong common investment philosophy that has remained unchanged since the strategy was launched in 1991.
They seek 30 to 35 quality companies capable of growing their earnings per share independently of the economic cycle. These companies tend to be dominant players, well-managed, and financially healthy. Stocks belonging to the most cyclical sectors, including financials and energy, are therefore deliberately excluded. The investment horizon is clearly geared toward the long term. With such an approach, the fund inevitably goes through periods of underperformance, particularly when the markets are favouring lower-quality and cheaper stocks. But the strategy's long-term record is admirable and a testimony of the team's superior skills.
The strategy is getting closer to its maximum capacity as the firm's core European equity mandates have recently reached €13 billion (£10.9 billion) of assets under management. We are monitoring the liquidity and any potential adverse changes to the structure of the portfolio but Comgest's responsible handling of capacity in the past is reassuring. The team also runs a Europe ex-UK variant of the strategy – Comgest Growth Europe ex UK – which we like as much.
M&G (Lux) Pan European Sustain Paris Aligned Fund
A well-executed approach with a sustainability angle
• Morningstar Medalist Rating: Silver (on the EUR C Acc share class)
• Morningstar People Pillar Rating: Above Average
• Morningstar Process Pillar Rating: High
• Morningstar Parent Pillar Rating: Average
• Morningstar Star Rating: ★★★★★
• Fund Size: €350 million
• Morningstar Category: Europe Large-Cap Blend Equity
This strategy offers a more blended approach compared to the other four strategies discussed in this article. Yet, this is not a lukewarm fund. John William Olsen is the lead manager, and he has run the strategy since 2014. He is well supported by a team of nine, and while we have seen some turnover over the last few years, we like the current team setup. The distinctiveness lies in the manager focus on holding a small number of companies that the team knows extremely well. The number of holdings typically ranges from 25-35, and turnover is very low. It uses fundamental work to look for compounders – companies with large moats, sustainable business models, and competitive advantages – which gives a bias to quality. A key decision was to "Paris align" the product in 2021 by identifying companies with a meaningful plan to reduce their carbon emissions with science-based targets; this builds on the growing influence of sustainability factors in this process.
Valuation assessment is also a cornerstone of the approach. This result in a balanced portfolio with quality characteristics but at reasonable valuations. The strategy's valuation metrics are well below growth players, such as Comgest Europe Growth and BGF European. Performance has been strong through Olsen's tenure and under various market environments. That's a plus for investors unwilling to stomach the style-related short-term underperformance that other funds listed in this article can experience to a greater extent.
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