In direct contrast to some of the more hysterical media prognostications induced by the Brexit vote, European equity markets continued to make progress in July. As with American equities, such progress was despite lacklustre earnings progression and it is this fact that worries us more than the perennial geopolitical noise which accompanies all things Europe. Continuing modest progress into the following month on wafer thin volumes macro issues lined up to greet European investors on their return from the August slumber. From evaporating faith in central bankers and their monetary lab experiments, to resurgent fears over Deutsche Bank, markets have had plenty to fret about in September, too.
The fund’s net asset value (NAV) returned 6.3% in the third quarter compared with a return of 9.0% in the benchmark index.
Over the third quarter our consumer staples allocation contributed most to alpha as Henkel revealed another set of strong results and the company lifted its guidance for the full-year. There were also positive contributions from financials Nordea Bank and ING. The healthcare sector detracted as our positions in Novartis and Roche Holding hurt performance. The sector continues to disappoint and we have therefore retrenched into those companies discovering and launching drugs which meet unmet clinical needs as this will secure their patents, their pricing and their future. Novartis and Roche fall into this category.
* Source: Morningstar, at 30 September 2016, nav-nav, net income reinvested, net of fees, Class A Acc shares, in Sterling. Past performance is not a guide to future performance. Prices can go up and down and you may not get back the amount originally invested. NAV = net asset value.
Fund activity review
|Discrete year performance
||Henderson European Selected Opportunities Fund (%)
||FTSE World Europe (ex UK) Index (%)
|1 year to 30/09/16
|1 year to 30/09/15
|1 year to 30/09/14
|1 year to 30/09/13
|1 year to 30/09/12
In terms of portfolio activity, while wary of banks in general we established a holding in KBC Group, a retail-oriented bank with a strong exposure to concentrated markets (principally Belgium). The company has recently announced the resumption of dividend payments, underscoring its return to capital strength. German cap goods name Siemens, which is delivering organic growth well ahead of its peers and is trading at a discount to its sector, was introduced. With the exit from lighting now underway, Philips finally appears to be serious about its transformation into a more focused, health-centric company. While we would like to see management streamline the business further, we see enough to warrant initiation of a position across our portfolios. We introduced Vinci as the construction sector in France seems to have stabilised in the first half of the year and the outlook is for gradual recovery in the second half, driven by new build residential construction. Its concessions businesses are, in our view, undervalued. Finally, in the materials sector we added speciality chemical company BASF.
We believe that the tactical oil sector theme initiated in the third quarter of 2015 has now largely run its course and we disposed of Royal Dutch Shell and BP, preferring GALP Energia which we increased. We added to our holding of technology name SAP where better-than-expected uptake of its next generation business suite is driving momentum. In the healthcare sector we reduced our active weight by trimming our holdings in Bayer, Sanofi and Novartis. Adidas has proven an excellent performer and we took the opportunity to book some profit.
Fund positioning and manager's outlook
We are probably in good company among European investors in noting that the top down view of the world can easily scare us, yet, when we stick to company specifics, we feel somewhat more relaxed. Perhaps the best way to highlight this is with reference to the Continent of Europe at large: our regular meetings with companies confirm to us that Europe is rarely as bad as the market or the media fears and will likely never be as good as it could be. So, like those companies, we get on with it. Meanwhile valuations are far from compelling. Plus ca change.
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