Europe has been catching investors’ eyes to start 2023 and there are few more consistent than Marcel Stotzel’s £3.9bn Fidelity European fund.
Over one year, returns were up 13%, the fifth-best result among the 148 funds in the IA Europe Excluding UK sector, but the team also delivered first-quartile results over 10, five and three years, achieving an FE fundinfo Crown rating of five.
Below, the manager discusses his current overweights and underweights, his outlook for dividends and his decision to continue to back private assets, despite them having been the biggest detractors to performance in 2022.
Performance of fund over 1yr against sector and index
Source: FE Analytics
Can you summarise your investment process?
We focus on three parameters: consistent dividend growth, downside protection and reasonable valuations. We buy stocks that consistently grow their dividends year-in, year-out and outperform the market, as long as we are not overpaying for them. Then we structure them together and monitor downside protection.
Even the most wonderful compounder in the world over many years can blow up and, if it does, it can be painful. But if you get the process right, you finish with a very attractive pool that should do well over time.
How do you balance downside protection with capturing the upside?
On a stock-by-stock basis, we have a set of criteria that we hope will protect us from blow-outs. We look at things like cash generation, strong balance sheets, proven business models, disciplined use of capital and strong management.
At the fund level, we make sure that we're very benchmark aware and stick within 5% of the over/underweight at a sector level. That is how we make sure that we're not just stuck with all defensive, high-multiple ultra-steady stocks and we're not betting everything just on the same type of investments. We really want stock picking to shine through.
Why should investors pick your fund?
We are typically viewed as a core fund for somebody who wants exposure to Europe excluding the UK. We promise our investors a 1 to 2 percentage-point outperformance post fees, and when you do that for 10 years, you get a really nice outperformance because of the wonders of compounding.
Where do you see dividends going forward?
This year there will be muted, low single-digit dividend growth. Dividends were cut massively in 2020, which posed a challenge for our process, because normally a dividend cut would be a massive red flag and we would be running for the exits. But governments were forcing stocks to hold back and there weren’t any fundamental reasons for the cuts.
LVMH was discouraged by the French government from paying out dividends not because it didn't have the cash, but as a solidarity metric. Then you have companies such as MTU Aero Engines whose world was ending because people weren't flying. MTU engines were just sitting on the ground, so it would have been irresponsible to pay dividends.
On this backdrop, 2021 and 2022 were inflated as dividends were catching up to normality. 2023 won’t keep up with those values.
What were your best calls over the past year?
For the best stock I’m going to say Total. We like its renewables strategy, which is by far the most progressive of any of the majors. We’re also bullish on its southern Africa discovery programme around Namibia.
Performance of stock over 1yr
Source: FE Analytics
All oil stocks went up quite materially post the invasion of Ukraine, but before that having any exposure to oil and gas was a contrarian’s choice. We love the idea that we were smart enough to fully predict the invasion everything that was happening over the coming months, but in truth we just felt that oil stocks were so unloved that they just needed a positive spark.
In the short term, diverting the energy supply from Russia is the main driver, but even in the longer term, they’ll profit from the massive underinvestment in the space over the last few years, which has been due to environmental, governance and sustainability (ESG) factors.
Was that a short-sighted approach to ESG?
That's a complicated argument, and I understand both the need to decarbonize and the need that for the next foreseeable future, we are still going to have a pretty material need for oil. So balancing those two is really a tough question and one that I'm glad I don't have to solve as part of my day job.
What about your worst stocks?
Among the worst performers were EQT and Partners Group, both private equity stocks and both down around 50%. They were in the middle of everything that could go wrong last year and struggled with very high multiples, exposure to financial markets and negative exposure to rising interest rates, as well as questions around the fundraising environment. We didn't anticipate just how quickly these very loved stocks could become unloved.
Performance of stocks over 1yr
Source: Google Finance
Is appetite for private equity materially impaired?
No, I don’t think so, and we still like the space a lot. There might be some investors freezing and deciding not to invest right now and to come back to me in six months’ time but on a three-to-five-year view I don't yet see any evidence that the demand for private assets is diminished. High interest rates are going to be a headwind, but private assets have sold off a lot, so there should be opportunities to buy at lower prices, take companies private at lower prices and what you lose on higher interest rates, hopefully you make back off a lower purchase price.
What other sectors look interesting?
Our biggest overweight is technology and currently, my main interest within that is Amadeus, a travel IT operator for airlines, travel agents, hotels and airports. The company is in a very sweet spot and well positioned for the short and long term.
Financials is a second biggest overweight, in particular banks and insurance, but mostly diversified financials, so the private equity players already mentioned.
The biggest underweights are industrials and telcos.
What do you do outside of fund management?
I'm a massive sports fan, I'll kick, throw or hit any ball in almost any shape or watch it played. I’m looking forward to the Rugby World Cup later this year.