European Equities


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. 

Income
Income investing targets stocks that pay out a regular income, usually through dividends. 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 European fund  


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 European Opportunities Fund     Schroder European Alpha Plus Fund


Income
Income investing targets stocks that pay out a regular income, usually through dividends. 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?

  • The lack of a permanent style or size bias enables us to avoid prolonged periods of underperformance.
  • Targets a high income with some long term capital growth
  • Invests in a concentrated portfolio of European equities, adopting a business cycle investment approach – one that recognizes that different stocks have the potential to outperform at different points in the economic cycle

Our philosophy

We believe in a diversified approach that aims to achieves consistent outperformance with a risk profile
that changes according to the phases in the business cycle. With a core focus on income-orientated
investments, the investment process groups stocks into different income categories which perform well at
different points in the cycle.

Investment process

The bottom-up element forms a more important part of the overall process for this concentrated
portfolio. There are fewer “factor” based decisions. The bottom-up process is rigorous; it typically begins
with analysis using a proprietary 3 factor, 90-data item database, then drills down quantitatively into
the history of the business from an income perspective, and the likely future trajectory of the growth,
sustainability and level of that income, before finally meeting with the company of sell-side analysts to
conduct qualitative analysis. A key part of the process is the meetings with the management teams of
the companies themselves, mainly through one on one meeting but also through group meetings and
attendance at company capital markets days. When attempting to understand an individual business,
James will also try to meet with competitors, suppliers and other related businesses in order to gain a
deeper understanding of the specific industry. The resources on offer from the sell side are also used
selectively, as well as independent experts and any other sources of information that can help with their
understanding of an investment case.The aim is to gain an insight into the culture of the management
towards dividends and the ability of the company to support a progressive dividend.

Factor

Data example

Goal

Dividend history

– 10 year history
– Growth in shares in issue

To establish whether the company
has a strong dividend track record

Income flexibility

– Operational and financial general
– Working capital intensity
– Capex intensity

To establish the extent to which
the P&L is a constraint on paying
dividends

Balace sheet strength

– Debt ratios
– Q score

To establish whether the balance
sheet can support a progressive
dividend policy

  Schroder European Alpha Income Fund     


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 European Smaller Companies Fund    


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 maket 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.

Our philosophy

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 to deliver stable, long-term positive returns with low volatility.

Investment process

Managed by Steve Cordell, the fund employs our ‘business cycle’ approach, a flexible strategy that avoids a permanent investment style bias and aims to capitalise on opportunities according to the stage of the economic cycle. For example, in a recovery phase, the fund typically takes long positions in industrial and consumer cyclicals and shorts the defensive style groupings. Conversely, in a recession, the fund 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.

By focusing on identifying turning points in the business cycle, the fund can shift its positioning ahead of the market so that it has the potential to deliver absolute returns in all phases of the economic cycle.

Funds

 Schroder European Absolute Target Fund