European Equities - test


Our approach to equity investing

Our European equity portfolios fall into seven different investment strategies. Each of the strategies we offer has distinct characteristics allowing investors access to European equities in a number of styles.

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Blend 
Our blend strategies are managed with no pre-determined style bias. We therefore aim to add value regardless of the market backdrop, using a disciplined bottom-up approach which leverages the strength of our research capability.

Business Cycle 
Combines top-down macro views with bottom-up analysis. Rests on our belief that different types of companies perform very differently, depending on where we are in the economic cycle. 

Growth/Quality
Growth investing targets stocks with above-average growth expectations; companies that we believe are locked into structural growth trends and, as a result, exhibit consistently high returns on capital, generating value for shareholders.

Value
Value investing targets companies whose share price does not, in our view, reflect its intrinsic value. It is a highly contrarian strategy, investing in areas of the market that are out of favour, in search of depressed share prices with the potential to recover strongly.

Income
Income investing targets stocks that pay out a regular income, usually through dividends. Crucially, we see income investing as a subset of value investing and select investments with a total return mindset. We want above average income at the portfolio level but a clear valuation case to offer us capital growth as well.

Small Cap
Small-cap investing can be potentially lucrative as small-cap companies can offer high growth potential compared to their mid- and large-cap counterparts. A lack of analyst coverage can also mean small-caps are incorrectly priced, offering investors the opportunity to profit.

Alternatives
Our absolute return strategies aim to deliver positive returns across all market conditions. They are typically benchmark-unconstrained and often employ different investment techniques compared to traditional long-only funds, such as short selling, leverage and derivatives.

Blend
Our blend strategies are managed with no pre-determined style bias. We therefore aim to add value regardless of the market backdrop, using a disciplined bottom-up approach which leverages the strength of our research capability.

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Investment opportunities in Europe

Martin Skanberg, European Equities Fund Manager 

Why invest?

  • Benefit from a diversified portfolio of both growth and value assets
  • Aims to generate consistent outperformance across different market environments with lower relative volatility
  • Extensive bottom-up research enables us to identify mispriced opportunities as well as ‘catalysts for change’ in a company

Our philosophy
We believe extensive bottom-up company research and analysis is key to generating alpha. We employ a team-based approach that leverages the skills and experience of our sector analysts, while our scale allows us outstanding access to companies, which helps to underpin our fundamental research process.

Investment process

We look at the market valuation of a stock and assess what that price implies about the market’s expectations for the company. We then aim to demonstrate where our projections differ from the market, in terms of sales growth, operating profitability or balance sheet returns. This ‘difference’ compared to market expectations forms the basis of the investment thesis.

However, valuation alone is not usually enough for us to buy a stock so we’re also searching for an inflection point or a ‘catalyst for change’. An inflection point is a credible potential catalyst, such as an improving demand outlook, management change, cost restructuring, capital allocation, dividend policy, merger and acquisition activity or disposals. The combination of these two elements – valuation and the inflection point – then informs the strength of our conviction call.

Funds

SCHRODER ISF EUROPEAN LARGE CAP    Schroder ISF EURO Equity    

Business Cycle Our business cycle strategy combines top-down macro views with bottom-up analysis. It rests on our belief that different types of companies perform very differently, depending on where we are in the economic cycle.

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Why invest?

  • Access to consistent outperformance throughout the different phases of the business cycle
  • By combining bottom-up stock selection with top-down macro views, the portfolio benefits from companies that perform well on a fundamental basis and are aligned to the prevailing stage of the business cycle
  •  The lack of a permanent style or size bias enables us to avoid prolonged periods of underperformance.

Our philosophy

We aim to capture the best European opportunities by understanding the companies most likely to outperform at each stage of the ‘business cycle’ namely – expansion, slowdown, recession and recovery. We believe in a diversified approach that achieves consistent outperformance with a risk profile that changes according to the phases in the business cycle.

Investment process

Our investment process separates the stock universe into seven style groups each with specific sensitivities to certain macro drivers. This, along with standard fundamental analysis, allows us to identify mispriced securities.

Growth; Growth defensives; Value defensives; Financials; Consumer cyclicals; Commodity cyclicals; Industrials cyclicals 

Each group will perform differently depending on the stage of the business cycle. We will adjust the fund’s risk levels and positioning so that it has the appropriate weighting to each of these different groups as we move through the business cycle. We avoid any permanent investment style bias by managing the tilts towards these groupings within the portfolio.

Funds

 Schroder ISF European Opportunities    Schroder ISF European Equity (ex UK)

 Schroder ISF European Equity Focus

Growth/Quality
Growth investing targets stocks with above-average growth expectations; companies that we believe are locked into structural growth trends and, as a result, exhibit consistently high returns on capital, generating value for shareholders.

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Why invest?

  • Offers the potential for strong capital appreciation in the long term
  • Diversifies exposure across a range of companies with different characteristics but, with a clear bias towards companies exhibiting quality and growth characteristics
  • Gain access to the full market cap spectrum. The fund is able to capitalise on market inefficiencies, often caused by a lack of industry coverage, by investing in small- and mid-cap companies.

Our philosophy

We focus on identifying attractive companies through a process of frequently meeting management teams and looking for growth prospects that are not reflected in the share price. An avoidance of ‘market noise’ and a focus on specific drivers of specific companies should add value and help to avoid the temptation to speculate too heavily on the overall direction of the market.

Investment process

Our stock-picking approach looks at the quality of a company’s business model, what’s driving cash flow, the sustainability of growth and margin expansion, management team and valuation. We have a bias towards ‘quality’ companies – those which exhibit consistently high returns on capital – often locked into structural growth trends.

70 – 85% of the fund's assets

Quality and growth: Structural drivers, earning consistency, balance sheet, cash flow return on average gross capital employed (CFROC)

5-20% of the fund's assets

Restructuring: New focus driving improved returns

0-5% of the fund's assets

Wild card: High growth or exceptional value

 
Funds

 Schroder ISF European Special Situations

Value
value investing targets companies, whose share price does not, in our view, reflect its intrinsic value. It is a contrarian strategy, investing in areas of the market that are out of favour, in search of depressed share prices with the potential to recover strongly.
 

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 Why invest?

  • Disciplined long-term value investing has been shown to deliver superior long-term returns than the market but requires patience and an acceptance of the potential for periods of underperformance
  • This style of fund uses a contrarian approach to seek out sound businesses with long-term value potential we believe is not reflected in the share price
  • Benefit from forward-looking stock selection methods – we use advanced valuation screens to help identify investment opportunities across the market cap spectrum – including small caps – that may have been neglected by the market
  • We demand a sizeable discount between the price we are willing to pay and what we believe to be its true worth. This discount provides a ‘margin of safety’, designed to protect the portfolio in case of an unexpected and adverse outcome.

Our philosophy

We believe markets are frequently inefficient, often due to the irrational behaviour of investors. This can cause financial securities to deviate from their true underlying value. We believe that valuation is the best determinant of future returns and historical evidence has shown that investment strategies based on low starting valuations not only deliver superior returns in the long run but do so with a significantly lower probability of financial loss.

Investment process

We scan our investment universe using valuation screens to help us prioritise research and allow us to challenge or reinforce our fundamental views. We then carry out thorough analysis into the companies that have passed the screening stage, placing considerable emphasis on the strength of a company’s cash flow and balance sheet. As part of our fundamental analysis of a company, significant weight is given to the potential downside risks of each investment candidate. We focus particularly on balance sheet risk, earnings risk and valuation risk. 

Funds

 Schroder ISF European Equity Alpha  

For more on Schroders’ insights into value investing, visit www.thevalueperspective.co.uk

Income
Income investing targets stocks that pay out a regular income, usually through dividends. Crucially, we see income investing as a subset of value investing and select investments with a total return mindset. We want above average income at the portfolio level but a clear valuation case to offer us capital growth as well.
 

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Why invest?

  • Profit from the long-term benefits of value style investing with the added security of a regular income stream
  • Benefit from a robust and clearly defined investment approach which supports our belief that lowly-valued securities have the potential to produce excess returns in the long term
  • Have confidence that you are investing in a total return strategy – we do not chase yield for the sake of yield and will always be looking to balance our income requirement with the potential for capital growth.

Our philosophy

Looking for income-generating investments requires discipline. It is never simply a case of identifying companies that pay the highest dividends but rather finding those which are underappreciated and undervalued. Therefore, selecting the best high-yielding stocks entails a fundamental analysis of the company’s underlying business. Companies with good quality management, visibly strong growth prospects and whose stocks are on reasonable valuations should offer the best opportunities to achieve long-term outperformance.

Funds

 Schroder ISF European Equity Yield     Schroder ISF European Dividend Maximiser

Small Cap
Small-cap investing can be potentially lucrative as small-cap companies can offer high growth potential compared to their mid- and large-cap counterparts. A lack of analyst coverage can also mean small-caps are incorrectly priced, offering investors the opportunity to profit.

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Why invest?

  • Small caps tend to have higher and longer-term growth potential than their large-cap counterparts
  • Successful small caps are often subject to M&A activity which can have a positive impact on performance
  • We have a dedicated pan-European small- and mid-cap investment team with an average of 18 years’ experience, who are able to identify the hidden value of small caps caused by a scarcity of information.

Our philosophy

We believe that small-cap markets are inefficient, presenting significant mis-priced opportunities for investors to take advantage of. Through a deep bottom-up approach, we seek to identify companies with strong long-term growth prospects based on three criteria:

  1. The quality philosophy: finding the rare companies, with sound fundamentals, that persistently perform
  2. The unloved but willing to change (value): companies that have historically performed badly, where there is a distinct catalyst for change
  3. The compelling themes: identifying long-term themes yet to emerge and the winners and losers of structural change.

Investment process

Company visits are a vital part of our research process. These visits and strong relationships ensure that we are fully aware of all relevant issues.

We use quantitative screens to highlight potential investment opportunities, incorporating a variety of growth, return and valuation factors. Whilst screens are not intended to drive stock selection, they can be useful in helping to prioritise and focus our research as well as to reinforce or challenge our fundamental views.

As a result of our fundamental research, we classify companies and industries in the investment universe within the following simple framework – the ‘investment triangle’:

Funds

 Schroder ISF European Smaller Companies    

Alternatives 
Within our alternatives strategies, our absolute return funds aim to deliver positive returns across all market conditions. They are typically benchmark-unconstrained and often employ different investment techniques compared to traditional long-only funds, such as short selling, leverage and derivatives.


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Why invest?

  • Long/short investing can enable investors to benefit from rising and falling markets while limiting market exposure
  • Low correlation with equity indices providing valuable diversification
  • Absolute return strategies can offer downside protection when markets are distressed
  • A strong performance track record and history of capital preservation.

Absolute return equities at Schroders

We believe the key to successful absolute return investing is having a clearly defined and disciplined approach. We carry out extensive and in-depth research to identify the most appropriate investment opportunities, wherever they may exist across the equity spectrum. This enables us to construct high conviction portfolios of carefully selected stocks in order deliver stable, long-term positive returns with low volatility.

Schroder ISF European Equity Absolute Return

This fund employs our ‘business cycle’ approach, a flexible strategy that aims to capitalise on opportunities according to the stage of the economic cycle. For example, when the economy is in a recovery phase, we will typically take long positions in industrial and consumer cyclicals and short the defensive style groupings. Conversely, when the economy is in recession, we will typically be long defensives and short cyclicals. As such, the fund may take directional views although it is still a broadly market neutral strategy.

The fund avoids a permanent bias towards a particular style of investing. Funds that consistently favour one particular style of investing are at risk of prolonged periods of underperformance when that style is out of favour. Our business cycle approach avoids this risk. By focusing on identifying turning points in the business cycle, we can shift the fund’s positioning ahead of the market so that it has the potential to deliver absolute returns in all phases of the economic cycle.

Schroder ISF European Alpha Absolute Return*

Schroder ISF European Alpha Absolute Return employs a bottom up approach with an earnings analysis focus. It is a more concentrated portfolio with around 20-25 positions on the long and short book, and exposure to macro economic factors is actively monitored. The fund focuses on pan-European equities, but can also take advantage of opportunities in North America. This is a market neutral strategy, so does not take a directional view of the overall market but focuses on understanding market trends by identifying dislocations at the earnings level rather than the valuation level. These dislocations help to identify low correlation investment opportunities,, unlike other stock-picking strategies.

Please note: *this fund is hard closed  

Funds

 Schroder ISF European ALPHA Absolute Return*    

 European Equity Absolute Return    

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