One of Europe’s best-performing equity funds has managed to achieve gains comparable to those seen in U.S. technology stocks, without relying on high-profile tech giants like Nvidia Corp. or Apple Inc. Instead, the fund has taken a different approach by investing in some of the region’s most undervalued companies.
Focused on Undervalued European Stocks
The Brandes Investment Funds Plc’s European Value Fund, which oversees around €678 million ($742 million) in assets, has achieved impressive results by focusing on companies such as Heineken Holding NV, Sanofi SA, and UBS Group AG. According to Bloomberg data, the fund has outperformed 99% of its peers over the past five years, demonstrating the effectiveness of its strategy.
The Strategy: Buying Below Long-Term Valuations
Co-fund manager Jeffrey Germain attributes the fund’s success to buying stocks that trade significantly below their long-term valuations. This approach targets companies experiencing temporary setbacks, either due to specific business challenges or broader economic conditions. “We’re looking for businesses that are out of favor, where we think the long-term value is above where they’re trading,” Germain explained. “We’re not trying to play the momentum aspects of the market or guess where earnings are going to be next quarter.”
Impressive Gains Despite the Absence of Tech
Since reaching a pandemic low in March 2020, the Brandes fund has surged 173%, according to Bloomberg data, trailing the 189% rise of the Nasdaq 100. Nevertheless, this achievement is notable given the fund’s limited exposure to technology, a sector that has dominated financial markets in recent years.
A Winning Bet: Rolls-Royce Recovery
One of the fund’s standout investments has been in UK engine maker Rolls-Royce Holdings Plc. The company faced significant difficulties due to COVID-related supply chain disruptions, but a turnaround program led by a new CEO sparked a dramatic recovery, with shares soaring more than 450% since late 2022. The Brandes fund took a position in Rolls-Royce that year, when the stock was trading near a 20-year low. “The business itself had been going through a number of idiosyncratic issues,” Germain noted, “but we thought the risks were not outweighing the opportunity.”
Limited Exposure to Big Tech
In a market dominated by enthusiasm for artificial intelligence and major tech companies, it is unusual for a European fund to outperform without significant technology exposure. Data compiled by Bloomberg shows that the Stoxx Europe 600 Index has lagged behind the S&P 500 Index in eight of the last 10 years. As of the end of August, information technology accounted for just 3.7% of the Brandes fund’s total holdings, significantly lower than the benchmark MSCI Europe Index.
Focus on Consumer Staples and Financials
The fund’s highest exposure is to consumer staples and financials, sectors known for having below-average price-to-earnings ratios. While concerns about falling interest rates affecting banks’ net interest margins have been raised by market strategists, Germain remains confident in the sector’s longer-term outlook. “The multiple being applied to banks still looks too low, and we do like the holdings in the portfolio,” he said.
Increasing Exposure to Luxury Goods
Luxury goods have also become a focal point for the fund. Companies such as Cartier owner Richemont SA, Gucci parent Kering SA, and Swatch Group AG have been impacted by weaker demand in China. Despite this, the Brandes fund has increased its allocation to the sector, while avoiding LVMH due to its high valuations.
Avoiding the Auto Sector
One area where the fund remains cautious is the automotive sector, which is Europe’s cheapest sub-index. The industry is grappling with declining demand and increased competition, particularly in the electric vehicle market. “You’re in a cycle that is negative, which creates fertile ground for us, but it’s not clear who the winners of EV transitions are going to be,” Germain said, explaining the fund’s decision to steer clear of automakers.
Conclusion
The Brandes European Value Fund’s strategy of focusing on undervalued stocks has paid off, allowing it to rival the returns of U.S. tech-heavy portfolios. By targeting companies experiencing temporary setbacks and steering clear of sectors with uncertain prospects, the fund has shown that value investing can still thrive in a market environment dominated by momentum and growth. As it continues to navigate economic cycles and sector-specific challenges, the fund remains committed to identifying long-term opportunities across Europe’s equity markets.
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