While Europe is currently facing some turmouil in markets and from the uncertainty of the Brexit decision, Columbia Threadneedle’s Mark Nichols is more sanguine about the outlook over the long term.
In the €3.94bn (£3.3bn) European Select fund he is looking for long-term outperformers and for companies with long-term views, rather than being perturbed by short-term market noise.
Nichols runs the fund with David Dudding, having joined the firm from F&C in 2015, where he had run the firm’s European Growth & Income fund since 2011. He was appointed fund manager on the European Select fund at the start of 2016, having been deputy previously.
Nichols says he looks for firms that have wide moats around the business, protecting them for market strains or pressures from the economy.
The fund delivered a 18.6 per cent return in 2015, compared to 10.9 per cent for the market, although year to date has been tougher, with the fund delivering a 4.7 per cent loss compared to the market’s 3.3 per cent fall.
Most recently, the fund has been hit due to its underweight to Germany, with the fund having a 10 per cent exposure to the market, compared to almost 20 per cent for the benchmark. The fund has also hit in July by the underperformance of certain defensive holdings, such as Anheuser-Busch InBev, which is a 5.1 per cent position in the fund. Unilever, which is the second largest position in the fund at 6.1 per cent, also hurt performance in the month, as it was hit by a slowdown in European sales thanks to pricing pressure.
Concerns on the horizon for Nichols include the political turmoil in Italy, as well as the pressure on the country’s banking system due to the large level of non-performing loans and incoming regulation.
The fund has an underweight to financials throughout the portfolio, however, one stock Nichols does hold is FinecoBank, Italy’s version of the UK’s challenger banks.
The firm is a technology-focused company, aiming to disrupt the banking sector and capitalise on Italians’ growing wealth and need for financial advice. It has plans in the pipeline for a robo-advice offering that it also wants to roll out in the UK. It sees 100 per cent of its clients coming from traditional banks, and fits Nichols’ need for companies with more stable margins and strong balance sheets.
Another theme of the fund that Nichols highlights is owning companies that are run by owners. Pernod Ricard, a 3.8 per cent position in the fund, is one such example, with the son of the founder now being the chief executive and the business having been in the family for generations.
“They are more aware of the risks that they are taking and of losing money. They are also not focusing quarter-to-quarter, they are investing over longer time periods,” he says.
Despite the recent underperformance of AB InBev, Nichols is still confident in the stock, particularly in light of its looming takeover of SAB Miller. In particular, Nichols says the deal will give the combined business giant market share in certain growing geographies, including 98 per cent share in Bolivia. The duo will own seven of the top 10 beer brands by value, but mainly he likes AB InBev because it is the “tightest, stingiest company imaginable”, with a fierce focus on costs.
Alcohol stocks are a theme through the portfolio, with Campari being another brand held in the fund. “Demand for these brands is pretty stable, when times get tough you still go for a drink after work or at lunchtime,” he says. “An ageing population is good for Campari and Pernod as they will spend more on alcohol and buy a better product. They can then reinvest that in marketing spend to rebrand drinks.”
Campari is currently enjoying a resurgence across Europe, with both the original Campari brand and also Aperol, which is becoming more popular in the UK and other European countries.
The company is also highly acquisitive, having made 25 acquisitions since 1995, with its latest being its largest ever – Grand Marnier. The family also still owns 51 per cent of the company.
The fund has around 40 holdings at any time, with the top-10 holdings typically making up almost half of the fund – it is currently 43 per cent of the fund. Nichols highlights the active share of the fund, at around 75 to 80 per cent, and is mindful of closet tracker funds in the market that “say they are one thing and are another”.