Dear client,

We are thrilled to have the opportunity to launch our European fund. It comes at an incredible – in the true sense of the word – juncture for European equities in particular, and markets in general. Previously we have been fortunate to launch funds at low points of the business cycle, in 2012 and 2020. I suspect that onwards from today, broad market returns will be harder to come by.

To our mind there is a clear bubble in a large part of the global equity market with overall aggregate valuations broadly unsupportive. This is a view much more widely shared among investors of all stripes than one would suspect when looking at those same investors’ asset allocations. Most market participants remain broadly invested, especially in the epicentre of the bubble, which is most acute in the US, in large caps, and in the growth style – particularly AI-related stocks. There is also a serious and somewhat related macro-economic issue surrounding fiscal sustainability, which again is most acute in the US. What to do about it? We hope we have some answers.

European equities though are not the epicentre of the bubble. That should afford them some relative protection – implicit growth expectations are more muted, valuations less extreme, ownership lower and – a point of underappreciated importance – governmental debt sustainability is much better. However, they are almost certainly not immune, particularly in certain highly-valued and cyclical compartments of the market. Our fund will strive to find attractive opportunities, both relative and absolute, which are outside the areas at risk of valuation bubbles bursting. We need to do this while minimising downside risk of the associated economic impact of a valuation crash (not least via a slowing of the expected AI capex boom, for example). That writes off other parts of the market, most notably many banks.

More positively, with active equities and European equities being in the doldrums over the last many years, there are clearly many overlooked opportunities to make good returns in the coming years. These seem to us to offer good absolute return opportunities in a lot of potential market scenarios. Many, if not most, of these sit in the small and mid-cap space, which has been a dull area for some time. Our sense is that capital is starting to return to this area, while fundamentals are bottoming out. Structural reform, low valuations, low but improving outlook and net flow turning from negative to positive. The investment implications are fairly obvious. 

Turning to specifics then, how to best exploit these opportunities while “sailing around the iceberg”, in a European fund context?

Let’s start with key market risks as I see them – how to lose money!:

1. Bubble valuation in Tech – especially in US, but Europe is not immune.

2. Risk of contagion to real world if this goes pop – not least AI capex bubble, but also consumer confidence, wealth effects etc.

3. Structural problems around government debt sustainability. Here Europe is good relatively, and fine from an absolute perspective, but again contagion risk to European cyclicals especially.

It appears most investors in their European allocations are very overweight the Growth style (especially tech), and Large-Cap Value (especially banks). This should not give those investors comfort at this point, in the same way having no value exposure in 2021 shouldn’t have, despite the seductive false comfort of prior performance. Given the aforementioned comments we are very nervous of both these areas. Banks are overearning and at political risk, and furthermore embed huge tail-risk exposure from potential contagion if the bubble bursts, both on top and bottom line (net interest margin compression occurs if rates are cut and provisions from bad debts will overwhelm any remaining bottom-line profit). We are underweight banks and zero weighted in tech. 

Set against this, there is lots of idiosyncratic value in European small and mid-caps. This is very analogous to the UK (but with a much stronger outlook from a top-down perspective, as DEBT/GDP is c. 80% and funding costs are about 3% or less. Many countries have even better metrics). This is the key factor we are looking to exploit, and our clear view is that policy, and investor preference, is starting to move the pendulum back the other way in terms of the flow environment. Remember, until 2021 this was a compartment of the market which consistently delivered mid-single digit outperformance every year. Now is the time to take the contrarian, positive view here. Our only note of caution here is that we are a little circumspect from a global cyclical perspective while still wishing to participate in a European recovery/ pickup.

From a business cycle perspective, the fund can be described per the pie-chart below – big slugs in Growth Defensive and Value Defensive, an outsized underweight to high Growth and Financial (especially Banks), so it can be thought of as a diversifier to large or small and mid cap Growth funds and large cap Value funds. This is relevant because if I am right about the outlook for these factors, there is unfortunately not much capital in Europe outside these areas, as shown in the grid below, using Morningstar style data.

From the most simplistic business-cycle perspective, overall we are looking about 60/40 defensive vs cyclical (a very broad brush metric - market about 55/45) which feels right – not a huge bet but to our minds given the valuation and economic risks which abound, the right side of the line. We don’t think the portfolio is particularly market directional.

Market cap factor, however, is where we are taking a bigger bet – the fund has 60% in <10bn market cap companies which are very depressed as we have discussed. This is a very explicit overweight compared to the broad index which has about 10%-15%[1] in these areas, and is arrived at from a bottom-up analysis of the stocks, rather than being imposed on the portfolio from the top-down.

Another feature is that the portfolio is very diversified by country. Our main area of caution is France for obvious reasons, which is just a 4% weight compared to the index around 20%, and that in Airbus and Essilor (multinationals). Germany, Netherlands, Switzerland the biggest weights but that is more a function of the bottom-up opportunity set rather than having been targeted explicitly.

The overall metrics of the fund are optically attractive: 11.7x forward PE vs market at 13.5x (contrast with US at 25-30x – i.e. 70% of global market and similar of client portfolios I imagine!). And for that you get a diversified range of stocks which are undergoing underappreciated positive change, growing earnings at 11% for next 3 years (c/ss forecasts), with 20% RoE (good quality, despite plenty of recovery i.e. depressed stocks) and strong balance sheets (0.8x ND EBITDA vs market on 3.1x ND EBITDA). The fund in aggregate has had slight eps upgrade momentum last 3 months[2].

From an individual stock perspective, Europe currently presents a rich seam to mine. Our top 10 are displayed below, and each have strong investment cases where the future is likely to be better than the market is expecting and, more importantly, than that which is currently priced into the shares. Many of the stocks we have owned for several years in previous iterations, but there are also some newcomers: an important benefit of a blank sheet of paper and an investment team with a very strong European stock-picking background. Overall, the stocks give a good flavour of the factors and opportunities we have discussed.

Cicor – our 10^th biggest stock – is an interesting case study. The company produces intricate circuit boards for clients in medical, industrial and defense industries. It’s not classic ’value’ in the sense it isn’t ‘cheap’ but, on 16x forward PE neither is it expensive. From the growth investor’s point of view, it also doesn’t screen well enough, with teens growth rates. However from our perspective it represents a valuable idiosyncratic opportunity with positive change underway. The lack of obvious ‘factor bucket’ is probably why this hasn’t yet been priced by the market

Cicor’s industry was historically very fragmented and horribly competitive with low overall growth. But over the last 4 years or so - with a new strategic focus - Cicor has built a strong platform onto which they can add niche technologies and production processes, as well as broaden their footprint into the (European) white spaces geographically. This gives them strong barriers to entry and a widening moat. In fact, the company can bolt on around 7-10% p.a. of top line from cash flow, while growing organically at a similar rate. We can have confidence around these targets as military is now 30% of the portfolio and so can easily contribute 5%+ of the 7% organic estimate – and as it grows as a proportion of the overall sales the growth, and consequently the rating, is likely to improve.

While this organic and inorganic growth occurs they will also be improving the competitive landscape, and then scale further improves the operating profit margin – a classic ‘compounding’ flywheel with network benefits. And the execution of this strategy has been strong, with several M&A transactions adding over 30% to the revenue and 50% of profit once synergies. The management also have a very good track record of capital allocation. In this context then, 16x forward earnings for many years of double-digit growth in an area the market is prepared to rate highly, is good relative value and the sort of overlooked opportunity to make strong returns which abound in the European market, outside the areas we consider a bubble. We hope (and expect!) that time will show many of them reside in our portfolio…

All that remains is to thank clients for their patience and support, and to look forward to our coming debates and discussions, in the months and years ahead.

[1] Source: MSCI. As at 11/11/25

[2] Source: Bloomberg, consensus estimates. As at 11/11/25, subject to change.