(Bloomberg) — One of Europe’s best-performing stock funds has matched U.S. technology’s steep gains without betting on companies like Nvidia Corp. or Apple Inc. – instead, by buying some of the region’s most undervalued stocks.
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Brandes Investment Funds Plc’s European Value Fund, which has approximately €678 million ($742 million) in assets and counts Heineken Holding NV, Sanofi SA and UBS Group AG among its top holdings, has outpaced 99% of its peers over the past five years defeated. This is evident from data collected by Bloomberg.
The winning formula, says co-fund manager Jeffrey Germain, is to buy stocks that are trading well below long-term valuations, either due to specific problems with the company or a weak economic cycle.
“We are looking for companies that are out of favor, where we think the long-term value is higher than where they are trading,” Germain said in an interview. “We’re not trying to play into the momentum aspects of the market or guess where profits will be next quarter.”
His fund is up 173% since hitting a pandemic-induced low in March 2020, according to data compiled by Bloomberg. The Nasdaq 100 is up 189% in that period.
An example of a big gamble that paid off is British engine manufacturer Rolls-Royce Holdings Plc.
The company struggled to recover from Covid-related supply chain issues before a transformation program led by a new CEO saw the shares rebound by more than 450% since the end of 2022. Germain’s fund bought the shares that year for the first, when it was trading near a 20-year low.
“The company itself was having some peculiar problems,” he said, referring to Rolls-Royce. “But we thought the risks did not outweigh the opportunities.”
Rolls-Royce declined to comment on the share price increase.
Not big technology
At a time when artificial intelligence and Big Tech are all the rage in the financial markets, it is rare for a European fund to outperform without significant exposure to technology. According to data compiled by Bloomberg, the benchmark Stoxx Europe 600 Index has trailed the S&P 500 Index eight of the past ten years.
Information technology accounted for around 3.7% of the Brandes fund’s total investments at the end of August, significantly lower than the benchmark MSCI Europe Index, according to the fact sheet. The consumer staples and financial sectors had the largest exposure; both sectors with a below-average price-earnings valuation.
While several market strategists have recently expressed concerns about the impact on banks’ net interest margins if rates fall, Germain says his longer-term conviction in the sector remains intact. “The multiple applied to banks still seems too low and we like the positions in the portfolio.”
Luxury goods are another area of focus. Stocks including Cartier owner Richemont SA, Gucci parent Kering SA and Swatch Group AG have felt the impact of weaker demand in key market China. All three are owned by Brandes, and Germain said he had increased allocation to the sector more broadly – although the fund does not currently own LVMH due to its high valuations.
One sector that is still out of favor is the automotive sector, the cheapest sub-index in Europe.
Most major European carmakers issued profit warnings last quarter as the sector faces weak demand, including in China, where companies are also facing competition from electric vehicles. Both are reasons for Brandes to stay away.
“You are in a negative cycle, which creates fertile ground for us, but it is not clear who the winners of the EV transitions will be,” Germain said.
–With help from Siddharth Philip.
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