Threadneedle: Attractive opportunities to be found in Europe

Despite the uncertain economic outlook, there are still opportunities to be had in Europe through careful stock picking and by finding value in the materials and healthcare sectors, says David Dudding, fund manager of the Threadneedle European Select Fund.

Since Dudding took over the fund in July last year, the fund has outperformed its benchmark index by 12.6 per cent. As the economic outlook for Europe and the rest of the world deteriorates, Dudding has increased his holdings in materials, in particular via industrial gas stocks, and continued to be underweight in financials. In addition, he has also reduced the number of holdings in the fund from 71 to 47, making it a high conviction portfolio.

"Given the level of volatility in the market, I have focused on defensive areas such as consumer staples and healthcare and maintained a significant underweighting of financials. However, the core philosophy of the fund is to invest in companies with the ability to sustain superior returns and to hold them for the long term. So, whilst the portfolio is likely to be underweight in industries with excess capacity such as banking, autos and airlines, there will often be special situations to exploit in these areas.

"Nestle is a great example of a company that typifies a number of characteristics we are looking for and is currently the largest holding in the fund. The business is highly geographically diversified and has good exposure to the growing theme of health awareness. It also has a very strong balance sheet, with a AA+ credit rating, is attractively valued and has a good visibility of earnings. I expect this company to be a long-term winner in its sector.

"With continued uncertainty remaining around the survival of a number of the large financial players and the future regulation of the industry, it's difficult to build a bull case for financials to lead the way in ensuing recovery. However, once more clarity emerges on these matters and broad sentiment improves, cheap valuations may see financials lead the market in the early stages of any recovery. Nevertheless, the longer-term leaders of the next bull phase are likely to be the strong companies with sustainable competitive advantage that we are focusing on in the portfolio.

"Overall, I remain cautious on the outlook for economic growth and earnings and expect the latter to fall by around 20 per cent in 2009 on an aggregate basis. However, we are still finding plenty of attractively valued companies displaying these characteristics and believe that these stocks represent excellent long-term investment opportunities."