CT European Select: February 2025 fund update

• Benjamin Moore is lead manager of the fund, supported by deputy manager David Dudding and 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 to 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 was 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, which also 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.

Charlotte Burrows joined the European team as an equity analyst in September 2023. She 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 good 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 that are 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.

Almost two thirds 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 (the broader European market), including financials, consumer discretionary and information technology, due to the promising opportunities they find. They avoid companies they believe don’t currently have as much pricing power, such as healthcare, energy, and utilities.

Recent investments added to the fund include EssilorLuxottica, an eyewear firm headquartered in France and home to well-known brands such as Ray-Ban and Oakley, as well as licensed luxury brands such as Burberry, Chanel and Ralph Lauren. Its strong brands and breadth across various markets makes it a leader in the industry. The fund managers also believe it could benefit from areas of growth including an ageing population that are more likely to require eyecare, development in lens technology, and smart glasses.

The managers have reduced investments in other consumer-related businesses. The consumer staples sector has historically been an area where the managers have found plenty of opportunities, but it’s gone through changes in recent years.

For example, many of these businesses did well during the height of the Covid pandemic, as demand for personal items remained buoyant and increased in areas such as beverages and spirits due to increased consumption of at-home drinks and cocktails. While this led to a period of higher company earnings, this hasn’t been sustained in a post-lockdown world, and means some companies are sitting on higher-than-normal levels of inventory to sell.

As a result, companies such as Nestle and liquor company Pernod Ricard have either been sold or reduced.

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. Our meetings with CT fund managers suggest the ESG tools are relatively well-used by the investment teams, and managers are generally aligned with the view that an understanding of ESG factors is essential if you want to get a full view of a company’s risk/reward profile.

The firm’s Active Ownership team coordinates voting and engagement activity. Engagement generally focuses on the current and emerging ESG issues that the team thinks will have the greatest impact on long-term investment returns, the economy, the environment, and society. The team also undertakes event-driven engagement in response to unscheduled or controversial events. All engagement is tracked in a company-wide database and accessible to all research analysts and portfolio managers.

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 0.64%, after a 0.15% discount available through the HL platform. The charge before the discount is 0.79%. 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, apart from in the Junior ISA where there is no platform fee.

Performance

The fund’s performed well over the long term, growing 137.80% over the last ten years compared with 120.70%* 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 which sector or 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, it’s grown 72.24% compared with 60.86% for the sector.

There have been tougher times as well though, such as in 2022, when the managers’ ‘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 managers don’t invest in these areas.

More recently over the past year to the end of 2024, the fund has performed similarly to the average fund in the sector, growing 9.18% and 9.75%, respectively.

Selling and no longer owning shares in Nestle helped, as it had a weaker year. Investments in software company SAP, construction and engineering manufacturer Saint-Gobain, and digital automation company Schneider Electric contributed positively to performance last year.

On the other hand, chemicals and ingredients distributor Brenntag was weaker and sold from the fund.

Moore and the team continue to focus on the fund’s long-standing investment philosophy and process, which is something we like to see. They’ve continued to focus on high-quality companies which offer sustainable returns and strong growth potential over the long run. This has the potential to help the fund hold up better than some peers during difficult markets.