James Rutland and John Surplice, managers of the Invesco European Focus Fund (UK), explain why they believe European equities is an attractive asset class and why ‘quality transition’ is key to identifying the winners of tomorrow.
Rethinking Europe
“European equities have been deeply unloved for some time. Flows have been negative, discounts to the US have widened, and they make up an ever-smaller weighting in global benchmarks. But for investors, the key question is what the future will look like – and the next decade is going to look very different to the last.
Key to this change is the emergence of new structural trends, requiring significant investment from both companies and governments alike. For example, the need to build renewable capacity within Europe. Digitalisation is another one. Europe is home to a vast and diverse range of mature, high-quality businesses poised to benefit from global megatrends that will drive returns over the coming years.
“European companies are already at the forefront of many of these megatrends, including decarbonisation, supply chain security, and deglobalisation. The biggest winners, however, will be those that capitalise on this ‘head start’ and continue to innovate and adapt their business models. It is this positive change that presents the most exciting investment opportunities.
Our ‘Quality transition’ approach
“We believe the market struggles to value companies undergoing transition, and our success comes from exploiting valuation anomalies where there is the potential and willingness to change.
“Transition can take various forms: restructuring, acquisitions, capital investment and ESG improvement, to name a few. Progress rarely happens in a straight line – it requires discipline, patience, and continuous active engagement – but once the quality transition driver(s) have been engaged, the characteristics of the stock can be transformed for the better.
“Siemens is one such company well placed to benefit from these new structural drivers. The market has been slow to recognise the improvements the business has made. Formerly a sprawling conglomerate, Siemens has radically restructured to focus on a smaller number of key divisions, including a digital industry business facilitating the development of the ‘internet of things’ and a building technologies business supporting the decarbonisation of housing stock.”
The Invesco European Focus Fund (UK)
James Rutland, fund manager, is celebrating three years2 as co-manager of the Invesco European Focus Fund (UK), a concentrated, ‘best ideas’ fund of between 35-40 European stocks from across the market-cap spectrum. Together with co-manager John Surplice, James aims to generate alpha by identifying fundamental company change.
The European Focus Fund (UK) has delivered 7.33%, 60.05%, 37.77% and 126.55% over one, three, five and ten-year periods respectively (against a benchmark3 of 6.55%, 31.29%, 30.47% and 108.74% over the same time period). Data to 31 May 2023.
