Equities

M&G (Lux) European Strategic Value Fund: Fund update – Q1 2025 Review and Outlook

5 min read 28 Apr 25

Marketing communication

Q1 Review

It was another busy quarter for global economies. European policymakers were jolted into action by President Trump’s seeming desire to reduce military commitments in Europe. Notably, the incoming German Chancellor, Friedrich Merz, announced a €500 billion stimulus package to invest in infrastructure and defence, as well as easing Germany’s so-called “debt brake” to increase defence spending.

This announcement coincided with the European Union’s proposed €800 bn increase in defence spending. These policies represented a potentially game-changing development for the continent that could provide a meaningful economic boost.

Against this background, Europe’s stocks led the way as one of the better performing regions globally. However, sentiment soon became gloomy due to looming US tariffs heading into the second quarter.

Fund performance

The fund outperformed this quarter, returning 8.6% versus 5.9% for its benchmark, the MSCI Europe Net Return Index. (Source of performance data: Morningstar Inc. 31 March 2025, EUR A Acc share class, income reinvested, price to price, net of all fees)

At a sector level, we saw relative strength from Materials, Industrials, Technology and Financials.

o Materials: Stock selection here was positive. Italian cement company Buzzi was up after Germany’s next government announced their aim to create a €500bn infrastructure fund. Whilst Buzzi is an Italian company, it may benefit due to some revenue exposure to Germany. Similarly, shares in European metal and mining stocks, including the world’s largest steelmaker ArcelorMittal, rallied in early March driven by news on Chinese steel output and the new German government’s pledge to ease the “debt brake” and increase infrastructure and defence spending.

o Industrials: Rheinmetall rallied as Europe ramps up on defence spending, with the company’s latest results noting “the highest sales in the company’s history” for its defence business. BAE Systems was another strong performer for similar reasons, with strong sales growth bolstered by new contracts and an expanding international footprint. Also, as a UK company, the stock’s rally was supported by Prime Minister Keir Starmer’s commitment to raising UK military spending to 2.5% of GDP by 2027, with an ambition of hitting 3% by the end of the decade.

o Technology: Our underweight to the sector was beneficial this quarter as a reversal of the tech momentum continued. The MSCI ACWI Information Technology Index suffered its worst month since September 2022, with some European names caught up in this negative sentiment. Not holding ASML was one of the top 10 largest contributors to relative performance.

o Financials: Our overweight to the European banks continued to benefit the portfolio. Spain’s CaixaBank was the standout here, demonstrating strong financial results - net profit increased by 10% YoY, supported by higher interest income and loan growth. Bank of Ireland was another with strong results, benefiting from strong loan growth and improved asset quality. Commerzbank and BBVA were also good performers this quarter.

In terms of detractors, our holdings in UK supermarket chain Tesco, Belgium-based pharmaceutical UCB and UK low-cost airline easyJet were among the biggest detractors from relative returns in the period. All three stocks declined in a rising market.
In addition, not holding any shares in consumer goods firm Nestlé and Spanish lender Banco Santander held back relative performance as the stocks registered solid gains ahead of the broader market.

Rolling period performance (%)	Year to end of MRQ²	YTD	1 Month	3 Months	6 Months	1 Year	3 Years %pa	5 Years % pa	10 Years %pa	FMT³ %pa
Gross - EUR A Acc	9.1	9.1	-1.8	9.1	7.9	16.9	13.5	20.7	8.1	8.4
Net - EUR A Acc	8.6	8.6	-1.9	8.6	7.0	14.9	11.7	18.7	6.3	6.4
Benchmark¹	5.9	5.9	-4.0	5.9	3.0	6.8	8.4	13.5	5.8	6.0

Calendar year performance (%)	2024	2023	2022	2021	2020	2019	2018	2017	2016	2015
Gross - EUR A Acc	16.9	15.4	3.5	27.6	-6.7	21.3	-12.9	12.7	5.2	11.9
Net - EUR A Acc	15.0	13.5	1.8	25.4	-8.3	19.3	-14.4	10.7	3.5	10.0
Benchmark¹	8.6	15.8	-9.5	25.1	-3.3	26.0	-10.1	10.9	3.2	8.8

Calendar year performance
(%)

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

Gross - EUR A Acc

16.9

15.4

3.5

27.6

-6.7

21.3

-12.9

12.7

5.2

11.9

Net - EUR A Acc

15.0

13.5

1.8

25.4

-8.3

19.3

-14.4

10.7

3.5

10.0

Benchmark¹

8.6

15.8

-9.5

25.1

-3.3

26.0

-10.1

10.9

3.2

8.8

¹ Performance comparison: The benchmark is the MSCI Europe Net Return Index. It is a comparator against which the fund’s performance can be measured. The index has been chosen as the Fund’s benchmark as it best reflects the scope of the Fund’s investment policy. The benchmark is used solely to measure the Fund’s performance and does not constrain the Fund's portfolio construction. The Fund is actively managed. The Investment Manager has complete freedom in choosing which investments to buy, hold and sell in the fund. The Fund’s holdings may deviate significantly from the benchmark’s constituents and as a result the Fund’s performance may deviate significantly from the benchmark. The benchmark is not an ESG benchmark and is not consistent with the ESG Criteria. The benchmark is shown in the share class currency. Prior to 1 January 2012 the benchmark was the FTSE World Europe Index. Between 1 January 2012 and 19 September 2018 it was the MSCI Europe Index, all stated as Gross Return. Thereafter it is the MSCI Europe Net Return Index. Net Return indices include dividends after the deduction of withholding taxes. Fund performance prior to 20 September 2018 is that of the equivalent UK authorised OEIC, which merged into this fund on 7 December 2018. Tax rates and charges may differ.

² Year to end of Most Recent Quarter: 31 March 2025. ³ Fund Manager Tenure: 01 February 2008

Source: Morningstar Inc. 31 March 2025, EUR A Acc share class, income reinvested, price to price, net of all fees. Gross returns are product returns (priced at midday) from Morningstar, with the actual Ongoing Charge Figure reinvested back into the price, including income reinvested. Performance data does not take account of commissions and costs incurred on the issue and redemption of units.

Portfolio Activity

It has been another busy quarter for us – we added the following names to the portfolio:

Barry Callebaut: One of the world’s largest chocolate companies based in Switzerland, which has derated rapidly following what we believe has been unwarranted mass panic selling driven by rising cocoa prices.
Lufthansa: German airline company that we have held previously, and whilst it has been struggling, we view potential upside cases on both a short-term and long-term basis.
JD Sports: We believe this is an attractively valued company with reasonable balance sheet. Though the UK sportswear retailer is facing some negative momentum, in our view, there is good evidence to show they are good operators with some scale benefits.
Sainsbury’s: UK supermarket retailer that is trading at an attractive earnings valuation, in our view, and with strong cash returns (dividend yield and buybacks); we think the competitive position also looks very decent for the foreseeable future as competitors Asda and Morrison struggle.
Sopra Steria: A French IT services firm which we believe is trading at a discount following our assessment of the fundamentals and future sector potential.
Tietoevry: A small IT company based in Finland which is the leading player in the Nordic IT services industry. Whilst the end market has been depressed, the company trades at an attractive earnings valuation, in our view, and even greater dividend yield, with potential for some rebound over our investment horizon.
Sirius Real Estate: A UK-listed company investing in German industrial-type real estate. The company’s share price has dropped following a small rights issue, broader economic concerns and rate trajectory. Despite this, we think it remains a compelling value creator: they have proved to be able to deal with serious shocks very well.

We also exited the following names this quarter:

Dowlais: Sold out following a bid from another company.
BIC: A relatively small holding which we sold out of to close off some of the tail and after reasonable performance.
Vivendi: French group split into four companies at the end of last year but the split hasn’t work very well due to some governance issues. We see better areas for our capital elsewhere.
Canal+ and Louis Hachette: We received these names as a spin-off from Vivendi; however, we question the new management. We have recycled this capital elsewhere.
Frontline and DHT Holdings: Both of these names were small positions, so we are somewhat consolidating our portfolio. We have concerns that capacity is not coming out of the shipping tanker industry ie, usually these vessels are retired after 20 years, but there appears of be a fleet of vessels which are not following this usual protocol.
TGS: Energy data company. Given the excess oil capacity at OPEC, we have reallocated capital to more attractive opportunities.

Outlook

As we progress through 2025, Europe is navigating a dynamic and evolving economic landscape. Potential positive developments, such as easing geopolitical tensions, ongoing economic recovery, and potential fiscal stimulus from major economies, could boost market confidence and drive up share prices. However, uncertainties persist. The ongoing Russia-Ukraine conflict, fluctuating commodity prices, and the potential for a global trade war present challenges. Rather than trying to predict these outcomes, our focus is on building a fundamentally strong portfolio.
While recent news flow regarding tariffs from the US administration is clearly front and centre, we feel it is important to keep an open mind and allow some time to see what emerges once the dust settles.
We are optimistic that investors will continue to appreciate some of the attractive fundamentals on offer in Europe. It is worth reiterating that the portfolio is well diversified, with reasonable exposure to defensives, which we believe could provide some protection during the current uncertainty.
We believe the dynamic European economic landscape, while currently volatile, offers opportunities to invest in financially strong yet undervalued companies. As markets react, we’re ready to capitalise on these opportunities as they arise.

Investment policy

The Fund aims to provide a combination of capital growth and income to deliver a return that is higher than that of the European stock market over any five-year period while applying ESG Criteria. The Fund invests at least 80% of its Net Asset Value in the equity securities and equity related instruments of companies across any sector and market capitalisation that are domiciled in or conducting the major part of their economic activity in Europe. The Fund invests in securities that meet the ESG Criteria, applying an Exclusionary Approach and Positive ESG Tilt as described in the precontractual annex. The fund’s recommended holding period is 5 years.

The main risks associated with this fund

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.
The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.
The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund.
ESG information from third-party data providers may be incomplete, inaccurate or unavailable. There is a risk that the investment manager may incorrectly assess a security or issuer, resulting in the incorrect inclusion or exclusion of a security in the portfolio of the fund.

Please note, investing in this fund means acquiring units or shares in a fund, and not in a given underlying asset such as building or shares of a company, as these are only the underlying assets owned by the fund.

Further details of the risks that apply to the fund can be found in the fund's Prospectus.

Sustainability information

The fund promotes Environmental/Social (E/S) characteristics and while it does not have as its objective a sustainable investment, it will have a minimum proportion of 20% of sustainable investments.

You can find the fund’s sustainability-related disclosures on the M&G website.

Find out more about the M&G (Lux) European Strategic Value Fund

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast and they should not be considered as a recommendation to purchase or sell any particular security.