Fund in focus: BlackRock European Dynamic

Posted by Liz Rees in Fund and industry updates category on 22 May 19


The team

Alister Hibbert has managed this fund since 2008 and this year he has been joined by co-manager Giles Rothbarth. The pair take a flexible approach and investigate opportunities across the whole market, moving between different investment styles as appropriate. They are supported by an extensive research resource of specialist analysts.

Investment philosophy & process

Hibbert and Rothbarth begin by evaluating companies, rather than the economy. Their team carry out fundamental analysis of company earnings and cash-flow to provide insights on different industries. They believe that, whatever the economic outlook, it is always possible to find ‘diamonds in the rough’.

The managers look to mitigate risk; for example, defensive stocks must have earnings which they believe will not fall materially in a downturn while cyclicals must demonstrate high exposure to corporate or consumer spending. They also consider the impact of technology, sustainability of demand and cost of capital. Such criteria leads to a preference for well-established, durable brands.

Turnover has been low but there is a strict sell discipline and the portfolio is tilted to either growth or value as market conditions warrant - it has been tilted towards growth since 2011. Although there is no defined style, valuation is crucial to the investment thesis; companies must have a robust medium to long-term earnings stream that is not fully appreciated by the market. This may include recovery situations as well as unrecognised growth.

Performance

Performance has been excellent during Hibbert’s tenure. The fund returned 15.3% annualised for the 10 years to the end of April 2019, while the IA Europe ex-UK sector was up 9.8% and the benchmark FTSE World Europe ex UK Index up 9.9% annualised. However, the willingness to adopt a ‘go-anywhere’ approach means it can go through periods of underperformance.

Current positioning

The fund is well-diversified by country, sector and market capitalisation. However, the portfolio can be very different to the benchmark as each position is derived from bottom-up stock selection. Currently the fund is overweight in France, Denmark and Italy and underweight in Germany and Switzerland.

The biggest sector overweights are consumer cyclical, industrials, technology and healthcare. Underweight positions are financial services and consumer defensives. Top 10 holdings tend to account for 3-6% of the fund and each position held will usually be within 3% of its benchmark allocation.

At a recent presentation, Giles Rothbarth highlighted some strong brands with exceptional pricing power they have invested in. Ferrari is one example of a unique brand; its exclusivity allows it to control sales volumes and it benefits from super-car limited editions.

Straumann is a dental implant manufacturer growing by product penetration, regional expansion and acquisitions in related markets. Meanwhile, Finecobank, is an Italian Bank with a highly scalable business model based on a differentiated digital platform; margins have improved by switching assets into fee-paying products.

Outlook

The return of confidence in prospects for China this year is important because it closely correlates with Europe’s manufacturing (Purchasing Manager Indices).The fund managers believe the setback in China and de-stocking effects are likely to be temporary.

What’s more, despite low inflation, it is still possible to identify shares with attractive rates of return on equity which are not reliant on an upturn in economic growth.

Our view

Alistair Hibbert has an impressive track record and we feel his clear process has the potential to deliver good long-term performance although clearly this cannot be guaranteed. Morningstar holds this fund in high regard and awards it a silver rating. Nevertheless, there are risks associated with this adventurous, albeit thorough, strategy which should be acknowledged. There is also the risk associated with overseas currency exposure.

Important information: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.