Top of the stocks

17 May 2017

We take a look at some of the stocks that are at the top of fund managers holdings and why they might prove to be successful long-term investments.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • Why fund managers are investing in certain companies
  • Why looking at a funds asset holdings can give vital insight
  • What stocks are proving to be popular

Scanning a fund’s top 10 largest holdings can be quite telling... as can be the changes in allocation and ‘ranking’ within the list. You can take a look at a fund’s top 10 holdings on the ‘analyse’ tab of the product factsheet page online.

The size of a position in a stock is reflective of the conviction that the fund manager has in that company. So, a high weighting relative to other stocks in the fund will usually mean that the fund manager has a very positive outlook on the company’s future.

These top stocks represent the best ideas that have been whittled down from a choice of hundreds, if not thousands of stocks. While the ‘top 10’ is an arbitrary number, these holdings can offer an interesting snapshot of the best thinking from some of the sharpest minds in the industry, and the top stock can act as a good representative of the type of stocks that the fund manager looks for.

So, how does a fund manager go about selecting stocks?

In an efficient market, where stock prices quickly adjust to new information, active managers seek to identify the stocks that will rise in value faster than the wider market.

Therefore in such an environment, fund managers and their teams of analysts are challenged to delve deep into these companies financial records, evaluate their market, their competition, their supply chain, client base, even the regulations they’re governed by in order to glean an insight that may not yet be apparent to the rest of the market.

As you’d expect, some managers are better at doing this consistently well than others. To put this into context, let’s look at a few of our preferred European Equity funds, their largest stock positions, and some of the reasons perhaps why these companies sit atop the fund’s list of stocks.

First we have Safran

Safran are the largest Aerospace supplier in Europe, specialising in aircraft engines.They are a French company with a truly global reach and (at the time of writing), are the largest holding of the BlackRock Continental European Flexible fund.

Following three years of relatively flat profits, the company may not have appeared the most exciting investment prospect. However, two things have alerted investors; first, the ramp up of Safran’s new LEAP engine, the next generation engine to power single-aisle commercial jets are thought to have generated a multi-year competitive advantage for the firm. Second, their acquisition of Zodiac Aerospace completed earlier this year and is starting to come to fruition.

As a result, the company has seen a boost in profits and the stock has delivered strong returns to investors year-to-date. However, you should note that the past performance of an investment is not a reliable indicator of future performance.

Next up we have Wirecard

A German Financial Technology (FinTech) firm which has achieved a global presence through their electronic payment solutions. Wirecard services tens of thousands of companies of all sizes, including the likes of O2, TFL, Monzo, Revolute, Alipay and has recently partnered with Chinese giant; Tencent to offer WeChat Pay.

Wirecard is the largest holding in the Jupiter European fund, with close to 10% of the fund invested in the company. By the nature of the fund’s investment philosophy, the stock has been selected not due to an undervaluation, but because of the company’s dominant position in the market and strong long-term growth prospects.

The development of innovative systems and payment technology, a skilled employee base and their expansive and established network of customers has created a robust and profitable business with high barriers to entry to ward off competitors.

Wirecard was the top positive contributor to the Jupiter fund in 2017, and the stock has risen considerably in price already this year.

Finally there’s Total

The Paris based company that might be most familiar pasted on the side of service stations. However Total are one of the seven ‘supermajor’ oil names in the world, coving the entire oil and gas chain from exploration, to refining, transportation and trading. Total are also emerging as a major player in the low-carbon and renewable energies space, with a particular focus on solar and bio energies.

The stock sits as the largest holding in the Invesco European Equity fund, which invests in companies that they believe are undervalued and so will typically target areas of the market that are generally ‘unloved’, such as financials, energy and telecoms sectors.

Despite being the largest company in the benchmark by market cap, the stock has struggled in recent years, with the decline in oil prices, bottoming in early 2016. Although Total are well diversified across the energy sector, the company holds a large exposure to the price of oil, and so have had to address their cost base and scale back their operations in several non-core areas.

As a result the company are in a good position to benefit from the modest rise in oil prices and as a result the share price has recently hit its highest level in a decade.

While these companies provide interesting food for investment thought , they are just a few examples of the kind of stocks that active management can allocate to in order to try to deliver above market returns. Our references to these shares are not recommendations to buy them. We don’t offer personal investment advice. If you’re unsure seek independent advice.

Here at Barclays we aim to identify the best managers that are able to consistently identify such opportunities over the long term, and compile them in a balanced and diversified portfolio accessible to retail investors. You should nevertheless appreciate that it is not possible to be certain which managers or companies will perform the best in future and all investments can fall in value as well as rise; you may get back less than you invest.

[Note: all stock positions and performance figures are at time of writing (08/18) and maybe subject to change]

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