European Quality Growth Strategy
Compounding quality across Europe's quiet leaders
To achieve capital growth above that of the MSCI Europe ex UK Index, measured in euros, over rolling five-year periods.
Europe is home to hundreds of companies that lead the world in something narrow. A maker of precision valves for semiconductor plants. A supplier of laboratory consumables. A Nordic business that builds the software behind half the region's ports. They rarely make headlines, and they are often under-owned by investors who track an index dominated by banks, energy companies and a few household names.
We look for businesses that earn well above their cost of capital and can keep reinvesting at those rates for a decade or more. Then we try to buy them at prices that leave room for disappointment.
The strategy launched in June 2017 and is run by Daniel Okafor. It is priced in euros, with a sterling share class for UK investors.
How we invest
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Returns on capital first
We want companies that have earned a return on invested capital above 15% through a full cycle, not just in a good year. That usually points to pricing power, a strong brand or high switching costs.
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A long runway
High returns matter only if a company can reinvest. We look for markets that are growing, fragmented or still moving from older technology, so profits can go back into the business at similar rates.
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Price discipline
Quality is not a reason to pay any price. We model each company's cash flows over five years and buy only where we see a reasonable return from today's share price. We trim when that return falls away.
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Patience
Turnover is typically 15% to 20% a year, which implies an average holding period of five years or more. We would rather know 35 companies well than 100 a little.
Key risks
The strategy invests only in European shares and holds a small number of them. Its value will move with European stock markets and can differ sharply from the index. Capital is at risk and you may get back less than you invest.
Quality growth is a style, and styles go in and out of favour. When markets rally hard in cheaper, more cyclical companies, or when interest rates rise quickly, this strategy can lag for a year or more. That happened in 2022, when the valuations of many of our holdings fell even though their profits did not.
Several holdings are mid-sized companies whose shares trade less often, so they can be harder to sell quickly. The share classes are not hedged: if you invest in sterling, a stronger pound will reduce the value of your holding even if the shares themselves have not moved.
Questions investors ask
Why leave out the UK?
Most of our clients already own UK shares, often through our income strategy. Keeping the two apart lets them decide their own balance between the UK and the continent.
Do you hedge the currency?
Not in the pooled fund. Sterling investors carry the euro exposure. Segregated mandates can be hedged back to sterling if a client prefers.
How do you define a quality company?
One that earns high returns on its capital, turns most of its profit into cash, has a balance sheet that does not need the goodwill of lenders and is run by people who think like owners.
Talk to the manager
Daniel Okafor meets investors and their consultants in London and on the continent. If you are reviewing your European equity allocation, we will take you through the portfolio company by company.
Contact us