CT European Select: February 2024 fund update

• Benjamin Moore is lead manager of the fund, supported by deputy manager David Dudding and newly appointed analyst Charlotte Burrows

• The team focuses on high quality companies they believe offer sustainable returns and strong growth potential over the long run

• Performance has been strong over the long term, helped by the team's stock selection

• The fund features on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The CT European Select fund aims to grow your investment over the long term by investing in high-quality European companies. The managers mainly invest in larger, more established European businesses.

We think it could be a good choice for exposure to Europe within a global investment portfolio or sit alongside other European funds using different investment styles, such as value or income investing, within a broader portfolio.

Manager

Benjamin Moore was appointed co-manager of the fund in April 2019 and became lead manager in January 2021. He's been part of Colombia Threadneedle's (CT) European equities team since 2015, where he initially analysed European smaller companies and served as deputy manager of the European Smaller Companies Fund. Prior to this, he spent six years with Goldman Sachs as a European small and mid-cap equities analyst.

David Dudding is deputy manager of the fund. He was previously lead manager from 2008 and, given his experience and success on this fund in the past, we're encouraged he remains involved as deputy manager. He's also lead manager of the CT Global Focus fund, of which a third invests in Europe, so he still spends a lot of his time analysing European companies. He works closely with Moore, sharing ideas and discussing market trends.

Roberta Zeno stepped down as the other deputy manager in August 2023 for personal reasons. Charlotte Burrows subsequently joined the team on this fund as an equity analyst. Burrows joined CT in 2019, initially as an analyst in the global equities team where she worked closely with Dudding on the Global Focus fund. She had therefore already developed a working relationship with the managers of the Europe Select fund before joining the European team.

The team remain supported by a well-resourced European equities team at CT. This group of analysts act as an important source of ideas for the managers and provide plenty of challenge and debate when it comes to investment decisions.

Process

The managers look for high-quality companies they believe offer sustainable returns and strong growth potential over the long run. They prefer companies who operate in industries with relatively few competitors and boast strong pricing power - the ability to pass on rising costs to consumers without denting demand too much. A competitive advantage that others struggle to replicate is another trait the managers like.

A long-term investment focus is important to the team. They look at what's going on within individual companies, rather than trying to predict the impact of wider economic or political events, which may have little bearing on a company's longer-term success. They don't make too many changes to the fund over time as a result. They also invest in a relatively concentrated number of companies, meaning each investment could have a big impact on performance, which increases risk.

Around half of the fund is currently invested in companies based in France, Germany, and the Netherlands. It also invests in other countries such as Switzerland, Spain, and Denmark. Some of these companies conduct business across the globe which means they're not only dependent on customers in the European countries they're based in.

The managers invest more in some sectors than the index, including industrials, consumer discretionary and information technology, due to the promising opportunities they find. They avoid companies they believe don't have as much pricing power, such as real estate, energy, and utilities.

Recent investments added to the fund include Ryanair, which the managers believe is in a strong financial position and has recovered from the Covid-related setback that impacted airlines. Luxury car manufacturer Ferrari was also added, due to its brand strength and a strong product pipeline.

On the other hand, Davide Campari-Milano (Campari Group) was sold. The managers feel the outlook for the spirits company is less certain following the acquisition of cognac brand Courvoisier and ahead of a new CEO joining in 2024. Pharmaceutical company Lonza was also sold after the outlook for the company lowered following the announcement its CEO would be stepping down.

Culture

The range of European funds is an important one for CT. A number of good-quality managers have come through the ranks within the European equities team, and broadly speaking their funds have performed well over the years.

There have been some changes within the team in recent years though, which is something we're mindful of. That said, we feel progress has been made here, including the way CT incentivises its employees. We're also pleased to see that the relationship between all three team members appears strong and collaborative. Team changes are something we'll continue to monitor.

ESG Integration

CT believes well-managed companies that look to the future are better positioned to navigate the risks and challenges inherent in business. In recent years they've developed several environmental, social and governance (ESG) tools. Our meetings with CT fund managers suggest these tools are relatively well-used by the investment teams. Managers are also generally aligned with the view that an understanding of ESG factors is essential to get a full view of a company's risk/reward profile.

The firm's Responsible Investment team carries out analysis on mega trends, carbon, climate change, and many other areas, and research is available for all CT fund managers to access. They are also accessible to fund managers for advice on ESG-related topics and coordinate the firm's voting and engagement activity. Engagement progress and voting activity is reported in a quarterly Responsible Investment report.

ESG issues form a part of this fund's team's research, and they engage with companies on multiple factors. They believe this is especially important when assessing the sustainability of a company's competitive advantage and the scope to produce long-term returns. Culture and governance analysis has played an ever more important role in their process. They believe these factors can have a significant impact on the long-term sustainability of a business, and governance should be at a high standard for a company to make it into the fund.

Cost

This fund is available at an annual ongoing fund charge of 0.65%, after a 0.15% discount available through the HL platform. The charge before the discount is 0.80%. This makes it one of the lowest-cost actively managed funds in the European sector available through HL.

The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund's performed well over the long term, growing 153.97% over the last ten years compared with 112.65%* for the average fund in the IA Europe ex UK sector. Our analysis suggests this performance has mainly been driven by the managers' stock-picking ability. They've been able to pick companies that have performed well over the long term, regardless of what size they are or which country they're based in, but remember past performance isn't a guide to future returns.

Moore became deputy manager in 2019 before being appointed lead manager in 2021. Since his time on the fund in 2019, the fund has grown 57.76% compared with 46.05% for the sector.

It hasn't all been smooth sailing though, and the fund had a tough 2022. Moore's ‘growth' style of investing fell out of favour with many investors, and this detracted from performance. Some energy, utility and oil and gas companies also performed well, but the manager doesn't invest in these areas.

Moore remains true to the fund's long-standing investment philosophy though, which is something we like to see. He has continued to focus on high-quality companies which offer sustainable returns and strong growth potential over the long run. This has benefited performance more recently and the past year was strong for the fund.

Positive contributors to performance include clothing company Inditex and ASM International, which provides tools and technologies to support semiconductor manufacturers.