Look past the crowd with Marlborough European Multi-Cap

One such area is Europe. Long beset by weak demographics, political concerns and a skew to troubled sectors such as banks, the region has been firmly out of favour among UK investors. They withdrew more than £2bn on a net basis from funds in the Investment Association’s Europe ex UK sector in the 12 months to the end of June.

But there could be reason for fresh hope: parts of Europe have so far coped with the coronavirus crisis better than others, while its stocks look cheaper than their peers in the US. European equity exposure could offer diversification from more popular parts of the market and in the longer term this is still a huge area that offers a home to plenty of growing companies worth investing in, provided a stockpicker can identify them.

One fund that has built a strong track record of picking Europe’s winners is Marlborough European Multi-Cap (GB00B90VHJ34). The fund’s managers, David Walton and his deputy Will Searle, take a bottom-up stockpicking approach with a focus on undervalued businesses that have above-average growth potential. Backed by a large team, Mr Walton maintains a list of 250 promising businesses from which he picks around 90 names, with an emphasis on traits such as the quality of a company’s management team.

The fund’s edge stems in part from a focus on smaller companies. Mr Walton argues that although they have the potential for large gains, most investors ignore such stocks because of their size.

A breakdown of the fund illustrates this bias. It had 40.2 per cent of its assets in small-caps (£250m-£1bn) at the end of June, with a 38.4 per cent weighting to microcaps (smaller than £250m). This heavy focus on microcaps even distinguishes the fund from some dedicated European small-cap portfolios.

The fund tends to have a low turnover rate, allowing the managers to run their winners as they grow. And while a focus on smaller businesses does expose investors to greater risk, this is partly offset by a level of diversification.

The managers diversify in part by holding a large number of stocks across a variety of different countries and sectors: its biggest positions recently included Swiss pharma giant Roche (SW:RO), French wireless connectivity specialist Microwave Vision (FR:ALMIC), Norwegian electricity supplier Fjordkraft (NW:FKRAFT) and Irish recruitment and staffing specialist CPL Resources (CPS).

A level of protection also comes from the fund’s ability to move across different parts of the market cap spectrum. As its name suggests, it is not restricted to smaller companies and the managers can back bigger names if required. The fund had 5.3 per cent of its assets in megacap stocks at the end of June, with 7.8 per cent in large-caps and 6.4 per cent in mid-cap names.

Investors may well want something less racy than a fund focused on the likes of small and microcaps, or something more exposed to the continent’s biggest names. As such, this fund may not appeal to everyone, or could serve best as a satellite holding alongside a more conventional offering. But if Europe is a region where careful stock selection is the best way to make gains, this is a flexible name with an approach that has served investors well over the years. Buy. DB