2022’s value rotation was a headwind for high-growth areas such as technology, in which the European Select strategy has greater weightings. But high-quality companies should be better placed to weather a higher interest rate environment and recession, if it comes.
The background for quality investment was tough over 2022, in both small and large cap areas. The context of growth versus value in the current environment is key, particularly the impact of interest rates and the risk of recession.
Our approach in the Threadneedle European Select strategy has a bias towards growth and not value – this is a key distinguishing feature of our style. The strategy’s performance and structure correlates better with growth indices than with value, and analysis of the portfolio by specialists such as Style Analytics also bears this out. Reinforcing this is sector distribution: the portfolio has greater weightings in technology and consumer sectors and lower exposure to traditional value sectors such as energy, utilities and banks.
2022 saw a value rotation at the expense of growth stocks, although this has partly reversed in recent months. This hurt the strategy, much more so than competing funds with a “value” orientation. Reinforcing the earlier argument, the main sector in positive territory in indices was energy; the worst sectors were high-growth areas such as technology. As a result, the first half of 2022 was the most damaging in terms of relative performance.
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The strategy’s long-term outperformance of the benchmark and our previous experience in recovering from short-term setbacks means we remain confident as we enter the last third of 2023.
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