Headline indices struggled to make progress at the beginning of the final quarter of 2016 as political risk returned to the fore. This risk, perceived or real, has now moved from Brexit via Trump to Europe and with it, the noise factor, as well as volatility, is likely to rise. European equities produced a strong end to the year with all sectors recording a positive return. While much of the current financial market commentary concerns itself with whether or not the “reflation trade” is right, it is clear that an acceleration in world economic activity is underway. Our sense is that, unlike the post-crisis era, this time it has legs. Indeed there is a breadth to this expansion which suggests that our view that the world is moving from a “growth” to a “value” market is well founded.
The fund’s net asset value (NAV) rose by 6.1% in the final quarter compared with a rise of 4.8% in the benchmark index.
European equities produced a strong end to the year with all sectors recording a positive return in December. At a sector level the financials sector, which remains our largest overweight, included contributions from Nordea Bank, DNB, ING and Bankinter. Energy was the top performing sector in Europe in the final month of the year and our holding in global integrated oil company GALP Energia continued its recent strong run. At a stock level Autoliv was once again among the top performers as the company recovered from earlier indications from management that they expect slower growth in its Active Safety division. Healthcare was the largest detractor as Novartis and Roche lagged.
While not wishing to be labelled by any particular style, since September 2015 we have gradually been tilting our funds back to what people might call “value”. We began buying oil stocks in the third quarter of 2015 as part of a tactical theme, and in the fourth quarter of 2016 we began increasing our exposure to banks. We see signs that markets may finally be at the beginning of a change in style leadership. Thus, in a busy quarter for portfolio activity we purchased domestic banks Danske Bank, Societe General and Caixabank amongst others as we believe we are approaching the end of a decade-long bear market for banks, as a combination of rehabilitated capital ratios and an inflection in interest rates makes the industry once again investable.
|Discrete year performance
Selected Opportunities Fund (%)
|FTSE World Europe
(ex UK) Index (%)
|1 year to 31/12/2016
|1 year to 31/12/2015
|1 year to 31/12/2014
|1 year to 31/12/2013
|1 year to 31/12/2012
*Source: Morningstar, at 31 December 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
In the belief that the luxury sector is at a turning point we introduced LVMH whose valuation looks attractive on an absolute and relative basis. We also took a position in auto parts manufacturer Michelin which has an undemanding valuation and further self-help potential.
We reduced our active weight to the healthcare sector principally by trimming our positions in Novartis and Roche and we took profit on our positions in Adidas, Astrazeneca and Compass Group.
Fund positioning and manager's outlook
As noted in our recent reports we believe that 2016 marked an inflection point in market leadership. If we are right that the baton has been passed to “value” then it is worth considering just how extended the move into bonds and their equity proxies has been in recent years. The risk to our view is a relapse in bond yields, yet we find it difficult to envisage why this should happen. We are all the more encouraged that European equities are once again an out of favour asset class.
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