European equities managed a blistering performance in 2023, with the FTSE Europe ex UK index returning nearly 15 per cent in sterling terms.
That, however, was not enough to overcome a deep aversion UK investors have long had towards the region. Investment Association data shows that UK retail investors dragged a net £2.5bn out of open-ended European equity funds over the first 11 months of 2023. That's in line with a broader trend: the sector hasn't seen a net inflow for a calendar year since 2017.
What might change this? The success of some of its most prominent companies, perhaps: anti-obesity drug maker Novo Nordisk (DN:NOVO.B) has seen its shares surge in the past year, pushing even higher at the time of writing thanks to a better-than-expected trading update.
From chipmaker ASML (NL:ASML) to LVMH (FR:LVMH), a few other names are turning heads, and appear increasingly often in the most popular global equity funds. ASML is currently the top holding for Scottish Mortgage (SMT), with Terry Smith among the fund managers who hold LVMH.
Unlike in some regions (think the US and even Asia), the best-known names in European markets don't exactly dominate the passive funds investors might turn to here. The FTSE Europe ex UK's top 10 constituents account for slightly more than a quarter of the index. That means investors wanting to go big on a stock such as Novo Nordisk might wish to either buy direct or seek out the active funds with high-conviction positions.
Turning to that point, it is notable just how heavily some of the biggest (and better-performing) European equity funds have bet on some of these names.
European Opportunities (EOT), which leads the pack by 2023 end returns, has a chunky 12.3 per cent allocation to Novo Nordisk, although none of the other top 10 constituents of the index appears in the fund's list of top 10 holdings. The trust's last annual report and accounts described Novo Nordisk's anti-obesity drug as offering "an almost completely new opportunity", adding that the scale of said opportunity is "hard to envisage".
Manager Alexander Darwall is known for going big on his favourite positions – although shareholders might remember how badly this backfired in the case of payments processor Wirecard, whose former chief executive has faced charges of fraud. It does remain an extremely concentrated fund, with the top 10 holdings making up nearly 70 per cent of the entire portfolio.
Darwall isn't completely alone here. BlackRock runs a handful of sizeable (and generally successful) European funds, and these have also tended to go with big bets. BlackRock European Dynamic (GB00BCZRNN30), which sits in our Top 50 Funds list for 2023 has a 10 per cent position in Novo Nordisk, with 4.9 in LVMH and 3.8 in ASML. Part of that fund's appeal, again, is a high-conviction approach, as well as its flexible mandate and substantial resources.
Looking at other big names, Fidelity European (GB0003874798) tends to back many of the market darlings, with seven of the FTSE Europe ex UK top 10 constituents appearing among its top 10 holdings, and accounting for just over a third of the portfolio. Some names such as Henderson European Focus (HEFT) are notably more measured on this front.
Investors do therefore have some options depending on how they want to play the Europe region. Whether they can overcome their dislike of that market, however, is another question.
