Fidelity European Values (FEV) aims to achieve long-term capital growth from its European equity portfolio by focusing on companies that are able to deliver medium-term dividend growth. This approach gives FEV a defensive bias as well as a yield close to the sector average. Although he acknowledges a number of positive indicators for the near term, manager Sam Morse sees an upcoming turning point in the economic cycle and the prospect of rising bond yields as negative catalysts for equity valuations. His caution is reflected in FEV’s low gearing and the recent concentration of the portfolio, as a number of holdings with weakening fundamentals have been sold into market strength during the first half of 2017.
Supported by Fidelity’s extensive analyst team, manager Sam Morse pursues a bottom-up approach, aiming to invest in companies with attractive valuations, positive fundamentals, strong balance sheets, predictable cash flow generation and the ability to grow dividends over a three- to five-year horizon. FEV’s portfolio typically contains 50-60 holdings and is diversified by sector and country, with weightings versus the benchmark broadly unconstrained. Gearing up to 30% is permitted but is generally at a more modest level (currently 3.6%).
The European market has performed well in 2017 to date, with gains being driven by improving corporate earnings growth, and Europe continues to appear more attractive than the US market on valuation grounds. However, while positive sentiment may support market performance in the near term, geopolitical risks have the potential to unsettle markets. Furthermore, the prospect of simultaneous monetary policy tightening by central banks globally and a resultant rise in bond yields has the potential to have a significantly adverse effect on equity valuations. In light of these grounds for caution, investors may find appeal in a fund with a defensive bias, investing in companies with strong fundamentals.
FEV’s share price discount to NAV (including income) has followed a narrowing trend since touching a three-year wide point of 17.3% in early July 2016, and the current 9.2% discount is narrower than its 11.3% one-year average and broadly in line with its three- and five-year averages (9.0% and 9.6% respectively). FEV’s dividend has grown in each year since 2010, and its 1.9% yield is close to the sector average.