Investors in BGF European Focus are well-served by their fund managers.
Industry veteran Nigel Bolton took charge here in February 2008. Bolton was head of European equities at SWIP, and he joined BlackRock with seven of his colleagues who had been working together for a number of years. Fortunately for investors here, the fund became much more stable under Bolton, as it had changed hands a few times prior to his arrival. The team supporting him is aptly experienced, close-knit, and, in our opinion, one of the strongest European equity teams in the industry. Bolton's co-portfolio manager on this offering, Simon Hunter, was appointed to this position in December 2016 to replace, Amy Dey, who remains on the team in a research role. We take comfort from the seven-plus year collaboration between Bolton and Hunter, and, with Bolton as lead portfolio manager, we do not expect this to affect the running of the fund.
The managers have a flexible approach to investing and look for companies with attractive medium- to long-term earnings power, as well as restructuring and turnaround situations that the market has overlooked. However, they do this whilst taking into account top-down risks, which include the current macroeconomic and stock market environment.
Performance during Bolton's tenure has been excellent, and the fund has outperformed the index and the Europe large-cap blend equity Morningstar Category average by a wide margin during his tenure. Although the concentration of positions in this 50-stock portfolio enables individual names to have bigger impacts on returns, it also leaves a thinner margin for error. This, coupled with the managers' willingness to go against the grain, means that investors should expect large gyrations in performance in the short term, for better and for worse.
We like the team-oriented process, and this fund is a good representation of the European team's core ideas. What lessens the fund's appeal is its 1.75% annual management charge. Although we remain confident in Bolton's ability to overcome the cost hurdle, we think this could be lower. The fund otherwise continues to hold much long-term merit and earns a Morningstar Analst Rating of Silver.
Performance
Since taking charge here, Nigel Bolton has shown that he has what it takes to navigate volatile market environments. The fund has outperformed its index by 200 basis points and peers by 289 basis points on average each year (to 28 Feb 2017). The fund's risk-adjusted returns have also been impressive.
2016 was a challenging year for the fund, and a large portion of the underperformance was driven by UK-related names: The fund's exposure to the United Kingdom was 40% in May 2016. The muted exposure to stocks with earnings derived from emerging markets also hurt. The team had identified attractively valued mining stocks but weren't convinced by the drivers that would result in a change in fundamentals and were concerned by the weak balance sheets.
The underweighting in banks was an additional drag. Over the longer run, Bolton has demonstrated his ability to manoeuvre the portfolio swiftly during different turning points in the market as performance in most calendar years between 2008 and the year to date has been amongst the best in its category. The fund’s standard deviation (a statistical measure of risk) has exceeded its average peer's as his willingness to step away from the crowd and take significant bets relative to peers means risk can run high here. That said, Bolton has made this risk pay and the fund’s Morningstar Risk-Adjusted Returns attest to that.
