European equities performed strongly in September following the usual summer slumber. Most noticeably the consensus narrative of a weak dollar and ever lower bond yields was challenged, the latter bouncing smartly from the September lows. Whether this turns out to be yet another short-term reversal or something more durable remains to be seen. Certainly, those of us with exposure to the European banking sector and a wariness of consumer staples could do with it being durable.
The fund’s net asset value (NAV) rose by 1.2% in the quarter compared with a rise of 3.6% in the benchmark index.
The financials sector was the largest contributor to outperformance over the quarter with strong performance from DNB, ABN Amro and KBC. We have been taking some profit in the sector although financials remains our largest single sector allocation.
At a stock level GALP Energia was the best performing stock as a rising oil price over the quarter boosted the energy sector. Automotive safety systems manufacturer Autoliv also contributed as the company’s announcement of a strategic review of its operating structure, to create separate companies of its passive safety and electronics divisions, was well received. Our industrials allocation lagged as low cost carrier Ryanair was impacted by an adverse European Court of Justice ruling and scheduling problems and chemical distributor Brenntag’s results disappointed.
|Discrete year performance
Selected Opportunities Fund (%)
|FTSE World Europe
(ex UK) Index (%)
|1 year to 30/09/2017
|1 year to 30/09/2016
|1 year to 30/09/2015
|1 year to 30/09/2014
|1 year to 30/09/2013
* Source: Morningstar, at 30 September 2017, 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
Activity over the quarter included the purchase of Merck, a conglomerate in the areas of pharmaceuticals, life sciences and performance materials. We believe that there is significant optionality in the pharmaceutical pipeline and an attractive valuation for the overall group, despite short-term caution on trends within its performance materials division.
We added ASML, the Amsterdam-based semiconductor manufacturer, as we believe it is well placed to benefit from key industry trends. We also initiated a small position in building materials manufacturer Lafarge Holcim, where we are encouraged by much needed management change. Finally, we introduced Italian utility name Enel which we see as the cheapest among the integrated utilities peer group and is undergoing a promising streamlining exercise under new management.
On the sell side we took profit on our holdings in Caixbank and Danske Bank while adding Swedbank, where we are attracted by the combination of an oligopolistic market structure and high profitability. We disposed of our holdings in AstraZeneca, Total and Sandvik to fund purchases elsewhere.
Fund positioning and manager's outlook
European equities look overbought in the very short term. Nevertheless, noisy geopolitics notwithstanding, we hold to our view that further gains are probable. For our own portfolios to fully capitalise we require no further relapse in bond yields, as well as leadership change from small-mid cap to large cap. This latter rotation seems as elusive as ever. It has to be said that our stock picking must also improve after a lengthy poor run.
Janus Henderson Investors
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