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COVID-19 has delivered a significant test for portfolio managers. Markets may have moved higher in aggregate, but there were complicated forces at work. The key is not to be knocked off course, but to find those companies with long-term growth drivers that can thrive not only in this crisis, but in all market conditions.
In the BlackRock Greater Europe Investment Trust, some of our holdings have been directly impacted by the virus, while others have been beneficiaries. For example, we have held Lonza, which has had a key role in helping develop the vaccine, but also DSV Panalpina, a transport and logistics business where performance is linked to trading volumes.
Lonza has done well, but DSV has also proved resilient in spite of challenging conditions. Our view is long term and we are looking for companies with specific characteristics that enable them to deliver long-term growth whatever the economic weather.
The right market
Active management was crucial this year. We have always believed that there are parts of the market that simply don’t lend themselves to long-term value creation, but the gap between businesses in structural growth and structural decline has widened this year as a number of important trends have accelerated.
When we look at companies, we ask whether the growth and return profile of the business is sustainable. When volatility hits, we needed to ask whether our original thesis has fundamentally changed. In most cases, it hadn’t. The type of themes reflected in our portfolio - the electrification of the car, investment in drug development and life sciences, the shift to a more digital economy, the rise of consumer spending globally – continued unabated and even gathered speed during the pandemic.
The team in charge of a company is always important, but it is particularly important during a crisis. For the companies in our portfolio hit hardest by the pandemic, it was the culture and management team that saw them through. They took the decisions that needed to be taken at the right time for the long-term strength of the business.
Once we have found those capable management teams, we need to give them time to execute effectively on their strategy, ensuring they deploy capital into attractive growth projects, steer the business to fast-growing parts of the market and keep the company on track through difficult conditions.
Once we’ve identified companies that have a winning franchise for the long term, our approach is to take a large position and back the company for the long term. We engage with the management teams all the time – in fact, we notched up 2,000 meetings last year.
We are only looking for 35-40 of the most compelling opportunities in the European markets. As such, we don’t need European economies to be racing ahead for companies in the portfolio to grow. That said, we believe there are real tailwinds for Europe at the moment.
We see a number of indicators in the real economy that suggest recovery is building: freight rates are moving higher, while there is growing demand for luxury goods. This is good news for European listed companies, which tend to be outward facing and geared to global recovery.
The monetary and fiscal policies of central banks and governments should also be supportive. The European recovery fund, which is the product of an unprecedented agreement among EU leaders to collectively borrow money to fuel spending needed to overcome the economic scars of the coronavirus outbreak, is a game-changer, delivering an unprecedented level of investment in the coming years. It marks a turning point in terms of political stability and collaboration.
Some industries are likely to benefit disproportionately. We are seeing adoption of electric cars accelerate as subsidies increase. This is before the EU green deal has been deployed to any great extent. Areas such as energy efficiency, renewable fuels and electric cars are all likely to see considerable investment in the near term.
This has been an unusual and difficult year, testing our process to the limit. However, we believe it has emerged intact, helping guide us to resilient companies that can survive and thrive in this crisis and the next.
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Risk: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
The opinions expressed are from BlackRock as of March 2021 and may change as subsequent conditions vary.
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