Investors are once again warming to European equities, after the sector has spent years out in the cold. While tariff turmoil has halted what was a positive start to the year, with the Stoxx 600 posting its best first quarter relative to the S&P 500 for a decade, Samantha Gleave, co-manager of the £1.8bn Liontrust European Dynamic fund, explains why fund selectors are taking a second look at their allocations in the region.
“It has been a really difficult environment in which to generate interest in equities over the past decade. The general message was that many fund selectors had only very modest exposure to Europe. But I would say over the past year or two, there has definitely been more interest. Maybe it’s due to some investors reducing that underweight position, which has accelerated further in recent months.
“At the end of 2024, on our valuation metrics, the US looked quite expensive and European equities moderately cheap.
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“The discount European equities were trading at compared with the US had widened in the latter stages of 2024, so that’s one factor behind the greater interest in European equities.
“Certainly in the past few months, investors have been reminded there are plenty of attractive opportunities within European equity markets.”
Gleave co-manages the fund alongside James Inglis-Jones. The strategy is the third-highest returning of the 118 IA Europe ex UK funds with a five-year track record to the end of March, up 128.5% over that time period. It is also the second-best performing over the past decade, according to FE Fundinfo data.
The managers are laser-focused on cashflow, which is central to their evaluation of ideas for the 35-stock portfolio. “The philosophy behind our investment process, which is always backed up by empirical evidence, is that we think corporate cashflow is the most important determinant of good share price returns,” Gleave says.
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“We want to buy companies that are either generating a lot of cashflow versus their asset base or versus their market valuation. That’s the starting point for stock selection.
“We make sure when we’re doing our due diligence on a stock that the management team has a really strong focus on cash generation. We want to see clear financial evidence of an intelligent use of cashflow, and when you look at the performance of good cashflow stocks over the long term, the results are impressive.”
Read the rest of this article in the April issue of Portfolio Adviser magazine