In recent years, tech stocks have led the U.S. stock market's surge, outperforming most others. However, one of Europe's top-performing stock funds has matched the strong gains of U.S. tech stocks without betting on companies like Nvidia (NVDA, Financial) or Apple (AAPL). By investing in undervalued European stocks, Brandes Investment Funds Plc's European Value Fund has outpaced 99% of its peers over the past five years. With approximately €678 million ($742 million) in assets, key holdings include Heineken, Sanofi, and UBS.
Co-manager Jeffrey Germain attributes their success to buying stocks priced well below long-term valuations. These stocks are often undervalued due to specific business issues or economic cycles. Germain emphasized that they look for forgotten companies with long-term value exceeding current trading levels, avoiding market trends and short-term earnings predictions.
Since the pandemic low in March 2020, the fund has soared 173%, compared to the Nasdaq 100's 189% rise. A notable success is the British engine manufacturer Rolls-Royce. Despite struggling with supply chain issues due to the pandemic, a CEO-led transformation since late 2022 has boosted the stock by over 450%. The fund bought Rolls-Royce shares at near 20-year lows, and Germain sees more opportunity than risk.
Despite the allure of AI and big tech, European funds rarely outperform with low tech exposure. The fund's info-tech holdings are just 3.7% of total assets, much lower than the MSCI Europe Index benchmark. Instead, it focuses on consumer staples and financials, sectors with below-average price-to-earnings ratios.
Despite concerns about interest rate impacts on bank net interest margins, Germain remains confident in long-term valuations for banks. The fund also emphasizes luxury goods, holding stocks like Richemont and Swatch Group, despite demand dips. Germain has increased allocations in the sector but has steered clear of LVMH due to high valuations.
The automotive sector presents challenges, with major European automakers issuing profit warnings amid weak demand and competition. This cautious view keeps the fund away from the sector as the path to a leading electric vehicle player remains unclear.
