The company metric that beats the market in Europe

Fidelity European fund manager Marcel Stötzel sits down with Sam Benstead to discuss how he invests in Europe. Core to his approach is finding companies that consistently grow their dividends, even if yields are low, as he says this is the sign of a high-quality company.

Stötzel also highlights the importance of a buy-and-hold approach to investing, and reveals a company that he has purchased recently.

Fidelity European is a member of ii’s Super 60 list of recommended funds.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Marcel Stötzel, manager of the Fidelity European fund. Marcel, thank you very much for coming in.

Marcel Stötzel, manager of the Fidelity European fund: Thanks for having me, Sam. Great to be here.

Sam Benstead: So, with £4.5 billion in this fund, it’s grown very large. It’s been very successful. Returns have been good. So what’s behind its success?

Marcel Stötzel: It’s really two factors. First, we found a process that we think works, and we stick to that process. In good times, in bad times, in fair weather and bad weather, we stick to it. Second, I think the real secret sauce is the Fidelity analyst team that provides us with ideas to match and meet our process and philosophy. We have 150 analysts around the world, which is a real army that we can draw on.

Sam Benstead: And how are you picking stocks? How is the portfolio managed?

Marcel Stötzel: What we’re looking for is dividend growers. People often hear the word “dividend” and get immediately caught up and think it’s a yield fund. But for us the word “growth” is as important as the word “dividend”. We’ve sliced and diced this data a million which ways, and companies that consistently grow their dividends year in, year out, massively outperform those that don’t.

If we can try and get that secret sauce of playing and finding those companies that consistently grow their dividends, we think that’s where the edge lies. To put some numbers behind it, we will happily own a stock that has a tiny dividend yield, like Hermes International SA (EURONEXT:RMS) or an ASML Holding NV (EURONEXT:ASML), as long as it’s growing very materially.

Sam Benstead: So, that dividend’s growth is a sign of a quality company, is that fair to say?

Marcel Stötzel: It’s a great question. I think it’s two things. First, the growth angle is a sign that the company’s doing well. But then people sometimes say to us, why don’t you just use earnings growth as many people do, just focus on earnings growth. For us, the distinction is very important, because a company like TotalEnergies SE (EURONEXT:TTE) is a great example. Earnings are obviously extremely cyclical with the oil price, but that’s not an excuse for them to not still consistently grow their dividend.

If they have forward planning, if they have the ability to save for a rainy day, we like that because it means, first, that the company actually cares about shareholders enough to do that. And second, [it] actually has the forward planning to be able to execute on a consistently growing dividend.

• Fund Spotlight: where to turn for quality growth outside the US
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Sam Benstead: And what’s the yield on the fund at the moment, then?

Marcel Stötzel: We’ll be around kind of 10% below the market. So, we are more expensive than the market almost always. But the key thing that you get for that is higher growth. You get higher returns. But, really, if we’re doing our job right, and this is what we saw during Covid, during the Russian invasion, we get more consistent dividend growth, i.e. more resilient dividend growth, which is really what we think the secret sauce is.

Sam Benstead: Around half the portfolio has been held for more than 10 years. Is it fair to say that you’re a buy and hold investor? Can you talk about some of the stocks you’ve held for a long time?

Marcel Stötzel: It’s not the only way to manage money, clearly. Some people do it very differently, and the market is becoming ever more short term. Holding periods in the market have come down materially. But, for us, we like it because that’s the school that we studied at, the Fidelity heritage. We’ve come through, Sam Morse and myself, as kind of portfolio managers, first as analysts and studying in that long-term school of thinking, and the world, as I said, it’s becoming ever more short term. That’s an increasing competitive advantage, we feel.

Second, the happy by-product of that is that you lower your transaction costs. There’s only one guaranteed way to lose money in our industry that I’ve ever found, and that’s to trade too much, and we try to do the exact opposite. So, some stocks Novo Nordisk A/S ADR (NYSE:NVO), ASML, Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC), weren’t household names as much as they are now, 10 years ago or more. We got in and have held happily ever since, which I think tells a good story [about] letting your winners run and getting the really long-term benefits of that.

There were people five years ago who would have found infinite reasons to sell any of those three, including valuation, including short-term fundamentals or anything like that. But we take quite a long-term horizon.

Sam Benstead: And those are companies you’ve held for a long time. Are there any new companies in the fund, say over the past two or three years, that you’ve introduced and that you actually plan to hold for the next 10 years or more?

Marcel Stötzel: Yes. One in particular that comes to mind is one that we bought about seven, eight months ago called Epiroc AB Ordinary Shares - Class A (OMX:EPI A). They do deep underground mining. So, massive diggers, massive trucks, that kind of thing. And there are only two players that can do that, Epiroc and Sandvik AB (OMX:SAND), both Swedish companies.

• Where to invest in Q2 2024? Four experts have their say
• Funds and trusts four professionals are buying and selling: Q2 2024

It’s a fantastic industry in normal times because each year that goes by an ounce of ore gets harder and harder to extract. You’ve got mines now that are a kilometre or more underground. It’s much harder than it was 100 years ago, and in 100 years’ time it will be much harder than it is now. So, you have that tailwind in terms of getting the ounce of ore or whatever it is, copper, iron or whatever, becoming harder and harder [to extract]. So, you’ve got that structural tailwind.

And then you also have the new tailwind, so things like electrification. The green energy transition is going to require more of a wide variety of minerals. We think Epiroc historically did 5% top-line growth, [but it can] now do more like 10% because of this great core business that’s being turbocharged, if you’ll excuse the pun, by the green transition.

Sam Benstead: Your portfolio is more expensive than the market on an earnings basis. Why is that and why is it worth paying up for good-quality shares?

Marcel Stötzel: Back to the earlier point around resilience. If you look through periods of crisis, and we seem to have had a lot of them over the last few years, [including] Covid, the Russian invasion and others, earnings growth and, more importantly almost, dividend growth was much more resilient than the market.

That’s typically the way we like to run the fund. We run it very conservatively and our goal is to outperform 1-2% post-fees per year. But really more than that, to kind of hold and maintain capital in times of crisis. So, while we are paying more in normal times, or it looks like more in normal times when that earnings number collapses or that dividend number collapses, that’s when our strategy makes up for it.

Sam Benstead: And Novo Nordisk, is it a top position? It’s been in the news recently with its weight-loss management drug. What makes that company so special and why have you backed it for such a long time?

Marcel Stötzel: It obviously originated as a diabetes company, providing insulin and the like very successfully to a number of people. Along the way they found that the GLPs [glucagon-like peptide] that they were using, the drugs that they were using, had a variety of other benefits beyond diabetes. Weight loss is the one you touched on, and obesity in and of itself is a massive epidemic. Some estimates [suggest that] there are over a billion people worldwide suffering from obesity.

Curing that in and of itself would have a wide variety of positive implications. But even beyond that, the drug is now being used for things like cardiovascular issues, potentially Parkinson’s, Alzheimer’s and a whole variety of other innovative paths that they can go down.

We strongly believe that the obesity runway is strong and long, but even beyond that, in the same way [the company] pivoted from insulin and diabetes to obesity, we think there are a number of other adjacent areas that Novo can pivot to.

• The hidden beneficiaries of the weight-loss drug boom
• Merryn Somerset Webb: investing doesn’t have to be all about America

Sam Benstead: Luxury is another big theme. So, Hermes, LVMH, and L'Oreal SA (EURONEXT:OR) could be classified as a luxury stock as well. Why do you like that sector and [why] is it so dependent on demand from China? How is that looking at the moment?

Marcel Stötzel: The real reason we like it is because of the pricing power. You know, pricing power is something that we spend a lot of time working on. Particularly in today’s environment [it’s] even more important than it was historically because of inflation. If your cost base is inflating out of your control, and your volumes are fixed in the short term, the only way you overcome that is through pricing power. So, companies that in the past could have succeeded without pricing power are getting found out much more. I can’t think of many industries that have more pricing power than luxury goods, you know.

If you take Hermes as an example, you typically have to spend £20,000 to £30,000 for the privilege of then spending another £10,000 for a Birkin bag. If you [are] on that path, which I’m not, full disclosure, but if you were, and you arrive at the store and they tell you it’s now £11,000 for the bag, you probably still buy it at that point. That speaks to the level of pricing power they have. That’s why we really like luxury.

China is definitely one of the big worries. All the recent results from China, and Louis Vuitton reported a few days ago, were actually quite encouraging, particularly as the China reopening is kind of finally happening. This was a big theme last year, and I think the market got a bit disappointed as to how slowly China reopened. But it is now happening much more, and places like Japan and other Asian countries are really seeing a big boost from spending, particularly given that luxury goods are often bought overseas in airports while travelling, that kind of thing.

So, China is something that we are monitoring and watching. But, for now, it seems like it’s holding up pretty well as part of that reopening trade.

Sam Benstead: Marcel, thanks very much. It’s been great talking to you.

Marcel Stötzel: Thanks a lot for having me, Sam. Much appreciated.

Sam Benstead: And that’s all we’ve got time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment, and subscribe. See you next time.