Tap into Europe's hidden value via Barings Europe Select Trust

Over the year to 24 November MSCI Europe index fell 4.5 per cent, while the MSCI Asia ex Japan and MSCI USA indices both rose almost 15 per cent. However, while European countries have been badly hit by the crisis this year, they also have the potential to bounce back strongly. European markets are more value-oriented than Asia and the US, and this area has started to perform better as successful results for three coronavirus vaccines support a more positive outlook. 

And while overall European indices may not have performed well, the size of these markets means that there are plenty of good companies within them, and the different countries in which they are listed are a diverse universe to invest across.

European smaller companies present particularly interesting opportunities, and EMIX Smaller Europe ex UK index has outperformed the broader MSCI Europe index over one, three and five years. 

“There are more than 5,000 companies from 25-plus countries in this asset class, so the opportunities are vast," says Darius McDermott, managing director at research company FundCalibre. "It tends to be under-researched, [which] means that a good fund manager can really add value by identifying the big winners.”

A fund run by a manager who has a good record of successfully exploiting market inefficiencies is Baring Europe Select Trust (GB00B7NB1W76).

Adrian Lowcock, head of personal investing at Willis Owen, says: “We like that [this fund's manager], Nicholas Williams, delivers a consistent investment process looking for companies' unrecognised growth opportunities. The focus is on well-managed companies at attractive valuations, and Mr Williams has a proven ability of investing successfully in rising and falling markets.”

Mr Williams and his team have a strict sell discipline, which involves taking profits on stocks where the price has risen considerably, scaling back the position to its original size. They also implement a stop-loss strategy, reviewing investments if they fall by 10 per cent and usually selling those that fall by 20 per cent.  

Mr Williams and his team aim to invest at least 75 per cent of the fund's total assets in smaller companies, which they define as the bottom 30 per cent of total market capitalisation in Europe ex UK. Almost 40 per cent of the fund is invested in consumer and industrial goods sector companies, and Germany, the Netherlands and Italy are its largest geographic exposures.

The fund had 94 holdings at the end of October, the largest of which included packaging provider SIG Combibloc (SWX:SIGN), hearing aid maker Amplifon (ITA:AMP), sales and marketing specialist IMCD (AEX:IMCD) and meal-kit company Hello Fresh (GER:HFGX). 

The fund is not heavily marketed as it has soft closed to new investors due to its size, but it is still available on a number of platforms including Hargreaves Lansdown, interactive investor, Willis Owen and AJ Bell. 

European economies face many challenges, the coronavirus pandemic is not yet over and national debt remains a significant issue for a number of eurozone countries. The end of the transition period for the UK’s departure from the European Union may prove to be a headwind for industries such as car manufacturing and agriculture. And Baring Europe Select Trust has underperformed EMIX Smaller European Companies Ex UK index over one year.

However, the fund does not invest in government debt. And Mr Williams' and his team's successful record of picking companies on attractive valuations has added up to strong returns over the long term.

So if you want to access European smaller companies and benefit from any appreciation for value stocks as we recover from the pandemic, Barings Europe Select Trust still looks like a good way to do this. Buy.