Fidelity European beats benchmark with Swedish Match holding leading returns

Fidelity European’s (FEV’s) NAV increased by 9.7% on a total return basis over the year ended 31 December 2020. This represented an outperformance of its benchmark, the FTSE World Europe (ex UK) index, which returned 8.6%. Important points of note from the corporate and manager level were the appointment of Marcel Stotzel as a co-manager alongside Sam Morsefrom, from 1 September 2020. FEV’s board also agreed a revised fee with effect from 1 April 2021. The current tiered rate of 0.75%  on net assets in excess of £400m will reduce to 0.65%.

On Marcel’s appointment, FEV’s chair, Vivan Bazalgette noted: “Marcel and Sam have worked closely together in recent years. Marcel is a very talented analyst and investor, with extensive experience in European companies. Marcel will help Sam with oversight of his different strategies and mandates and also assist in client servicing and marketing. The move to a co-portfolio manager structure strengthens the investment process by introducing greater challenge and also increases the ability to meet more companies and, effectively, be in two places at once. Marcel as Co-Portfolio Manager will share a common investment approach and complementary investment experience. The appointment will not result in any changes in terms of investment philosophy, investment process or portfolio characteristics. Sam remains the Lead Portfolio Manager and will continue to be accountable for portfolio construction.”

Returns led by Swedish Match holding

The top contributors and detractors from the year are shown in the tables below.

On FEV’s performance over the year, Sam noted: “Our investment objective is to outperform the Benchmark Index steadily and consistently over a number of years. We are not trying to shoot the lights out. The company will have good years and it will have bad years but over longer periods of time steady outperformance of the Benchmark should deliver returns competitive with the peer group average. It was pleasing that 2020 was another year where the Company, with the NAV total return rising by 9.7% in UK sterling terms, did better than its Benchmark which was up by 8.6% on the same basis. It was, however, a wild ride with the company substantially ahead of its benchmark after nine months before lagging significantly in the final quarter. It was as if we were five-nil up going into the last twenty minutes of a football match only to edge it five to four at the final whistle. The company had a poor October when SAP issued a warning (more on this below) and then the Company failed to keep pace with the market in the sharp rally which followed the welcome news that the first two vaccines were more effective than expected. Despite this, the discount narrowed significantly in the last quarter of the year such that the share price, which rose more than 13% on the same basis, did significantly better over the year than both the benchmark and the NAV of the company.”

‘It’s time in the market, not timing the market, that matters in the long run’

In the outlook section, Sam noted: “We like the advice of Peter Lynch who said: “Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested”. Maybe we should add predictions about the pandemic to that list? Anyway, as investors, we will remain focused on the companies in which we have invested and, in particular, on their ability to continue to grow their dividends. As always, we will ask ourselves if that rate of dividend growth is already discounted in the share price. We are, of course, also always on the lookout for new opportunities to add to the portfolio at the right price. Valuation still matters. That may be a concern for the market as a whole right now because valuation levels, in aggregate, are high relative to historical norms. Clearly, that’s partly discounting a continuing recovery in earnings and dividends as vaccines are rolled out and economies emerge from the pandemic. It’s also partly due to the very low bond yields and ample liquidity supplied by supportive central bank policy. Inevitably, however, as an investor, one must expect the unexpected. And sometimes, hiccups arise when, as now, sentiment is bullish and investors least expect it. For our part, we remain confident that equities will rise in the long term and, as this year has shown, it pays to stay fully invested, or even modestly geared, through stock market cycles. As the old adage goes: it’s time in the market, not timing the market, that matters in the long run.”

FEV: Fidelity European beats benchmark with Swedish Match holding leading returns