European Smaller Companies Equity Fund

Capital at risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

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Overview

Manager's Outlook

The current investment environment continues to be marked by a high degree of geopolitical and economic uncertainty. There is a wide range of potential outcomes for consumer and industrial confidence and expenditure, inflation, and central bank actions.

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At such times, we believe it is even more important to remain focused on fundamental smaller-company research where we can have an edge. While an awareness of the macroeconomic and political environment is necessary, we look to discover those companies that can be much larger in five to 10 years' time whatever transpires.

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European smaller-company shares have pulled back sharply this year. Even so, recent developments are likely to continue putting pressure on costs, supply chains, and demand, weighing on corporate earnings across most sectors.

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Central banks have signaled that they are determined to tighten monetary and fiscal policy in Europe and elsewhere, prioritizing the fight to bring down inflation?which we think could persist at a high level for some time? over economic growth. In our view, this could be a less supportive backdrop for equity markets.

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The multiple dramatic events of the last few years have been a trigger for transformations across many industry structures. This is a dynamic that we consciously look to exploit, and we are focused on identifying those companies that will be material beneficiaries of these forces. Genuine insights here will be valuable as the market is wrestling with considerable uncertainty as to how individual companies are positioned.

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In these uncertain times, it is important to be prepared for market dislocations triggered by events. The market rotation and volatility are presenting us with some new opportunities, although there are fewer of them in sectors that we think have structural challenges and where we are meaningfully underweight.

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We are also focused on defending those holdings that have recently been sharply derated but where the business remains fundamentally robust and may even be stronger after recent events. As we enter a slower economic environment, the investment attractions of smaller companies that do have a more sustainable growth outlook should become stronger.

Strategy

Fund Summary

Our approach incorporates intensive, fundamental research seeking to identify small and mid-sized companies capable of sustaining above-average, long-term earnings growth and selling at reasonable prices. We aim to discover attractive companies at an early stage and hold them while they compound appreciably over the long term. The promotion of environmental and/or social characteristics is achieved through the fund's commitment to maintain at least 10% of the value of its portfolio invested in Sustainable Investments, as defined by the SFDR. Additionally, we apply a proprietary responsible screen (exclusion list). The manager is not constrained by the fund’s benchmark, which is used for performance comparison purposes only.

OUR VIEWS ON EUROPE

Performance - Net of Fees

Past performance is not a reliable indicator of future performance.

30-Apr-2024 - Ben Griffiths, Portfolio Manager,

Smaller-company shares in Europe fell in April on fears of escalating conflict in the Middle East, mixed corporate earnings and uncertainty over interest rates. At the portfolio level, stock selection in health care, materials and real estate boosted relative performance. Our investment in a mining company in southeast Europe was the top performer in materials. The shares continued to climb, with the company confirming that it is on track to increase commercial production around the end of the year. It also benefitted from a rally in base and precious metals. On the other hand, our choice of securities in industrials and business services, consumer staples and consumer discretionary eroded relative returns. Our holding in a chemicals and food ingredients company was the worst performer in industrials and business services. The shares came off a record high in April after the company missed earnings estimates for the first quarter due to an increase in underlying costs.

30-Sep-2022 - Ben Griffiths, Portfolio Manager,

Focus Stayed on Lower-Valued, High-Quality Cyclicals

In this challenging environment, we have been even more mindful of the high valuations and elevated inflation, which is leading to higher input costs and pressure on margins. We continued to seek high-quality franchises that offer an improved exposure to cyclical factors at a lower valuation, most notably within industrials and business services, and positions that need to be defended or exited during the ongoing market decline. We narrowed our gap to energy, investing in a Norwegian company that provides seismic data to oil companies.

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We initiated in four positions and exited seven. Health care, information technology, and consumer discretionary remain our largest sector allocations, while we are least exposed to real estate and industrials and business services.

Consumer Discretionary

We raised our overweight allocation to the consumer discretionary sector, enticed by opportunities emerging from a sectoral decline caused by slumping consumer confidence and a reduction in disposal income.

We initiated a position in Ariston, a manufacturer of products and solutions serving the heating and hot water markets. We believe the company should benefit from increasing demand for its heating solutions as the European economy aims to reduce its carbon footprint.
We exited Just Eat Takeaway, an online takeaway food delivery aggregator. The stock has struggled to recover from a decline in demand following the lifting of coronavirus lockdowns and a reduction in consumer spending as a slowdown grips the economy.

Industrials and Business Services

We continued to adjust our holdings in industrials and business services, ending less underweight to the sector. The sector came under further pressure as central banks raised interest rates and an economic slowdown deepened. However, we are seeing more opportunities that have factored in the worst of the economic news, particularly among cyclical stocks.

We bought the shares of Valmet, a leading Finland-based provider of services and equipment to the paper, board, and pulp industry, at an attractive valuation. In our view, this high-quality stock is pricing in a deep recession, which indicates that the market undervalues its ability to deliver consistent profit growth.
We exited Intertrust, a Netherlands-based company that provides trust and corporate services to corporations, funds, financial institutions, and private individuals, taking profits after a strong run. In our view, the shares have little room to rise further on valuation grounds.

Real Estate

We reduced our underweight exposure to real estate, where some companies are now trading at attractive valuations due to the rising interest rate environment.

We added Nexity, France's leading homebuilder, to the portfolio because we believe the market is underestimating its ability to deliver consistent growth and an attractive dividend. The company delivers a high return on capital employed and has low leverage while benefiting from a stable housing market.

Energy

We increased our exposure to the energy sector, which we believe could benefit from an increase in exploration and production.

We added TGS, a Norwegian company that provides seismic data to global oil companies. TGS should benefit as oil companies step up exploration and production amid an increase in demand for oil.

Health Care

We continued to pare our large allocation to the heath care sector, a key long-term bet that contains some of the portfolio's largest relative and absolute positions, exiting some positions that have performed well or that have not matched their earlier promise.

We exited Cvs, a UK-based holding company that operates animal veterinary practices, veterinary diagnostic businesses, pet crematoria, and an online pharmacy and retail business. The stock has disappointed since a sharp decline at the beginning of the year. While the share price should benefit from increased demand from a larger UK pet population since the coronavirus pandemic, there are signs the company will find it harder to expand via mergers and acquisitions as vet growth normalizes.
We exited Ambu, a Denmark-based provider of diagnostic and life-supporting devices, which has struggled to recover since the downturn at the start of the year. The company issued another profit warning in August, with results revealing a lack of growth in the single-use gastrointestinal endoscope business despite substantial investment and an unexpected drop in the bronchoscope sales. New management announced a program of cost cuts to improve cash flow and promised a new strategy in November.

31-Jan-2024 - Ben Griffiths, Portfolio Manager,

We maintained a tight focus on risk management and valuations and sought to identify opportunities among cheap high-quality growth companies with strong balance sheets and capable management teams. We trimmed our above-benchmark position in information technology (IT), exiting a provider of IT infrastructure and services, due to a broken investment thesis. We expected the stock to benefit from a structural IT upgrade in Germany but fiscal tightening is restricting the public sector’s ability to expand IT spending. We also reduced our allocation to health care, exiting a drug research alliance and development partnership company after sudden management changes.

30-Sep-2022 - Ben Griffiths, Portfolio Manager,

We initiated a position in Ariston, a manufacturer of products and solutions serving the heating and hot water markets. We believe the company should benefit from increasing demand for its heating solutions as the European economy aims to reduce its carbon footprint.
We exited Just Eat Takeaway, an online takeaway food delivery aggregator. The stock has struggled to recover from a decline in demand following the lifting of coronavirus lockdowns and a reduction in consumer spending as a slowdown grips the economy.
We bought the shares of Valmet, a leading Finland-based provider of services and equipment to the paper, board, and pulp industry, at an attractive valuation. In our view, this high-quality stock is pricing in a deep recession, which indicates that the market undervalues its ability to deliver consistent profit growth.
We exited Intertrust, a Netherlands-based company that provides trust and corporate services to corporations, funds, financial institutions, and private individuals, taking profits after a strong run. In our view, the shares have little room to rise further on valuation grounds.
We added Nexity, France's leading homebuilder, to the portfolio because we believe the market is underestimating its ability to deliver consistent growth and an attractive dividend. The company delivers a high return on capital employed and has low leverage while benefiting from a stable housing market.
We added TGS, a Norwegian company that provides seismic data to global oil companies. TGS should benefit as oil companies step up exploration and production amid an increase in demand for oil.
We exited Cvs, a UK-based holding company that operates animal veterinary practices, veterinary diagnostic businesses, pet crematoria, and an online pharmacy and retail business. The stock has disappointed since a sharp decline at the beginning of the year. While the share price should benefit from increased demand from a larger UK pet population since the coronavirus pandemic, there are signs the company will find it harder to expand via mergers and acquisitions as vet growth normalizes.
We exited Ambu, a Denmark-based provider of diagnostic and life-supporting devices, which has struggled to recover since the downturn at the start of the year. The company issued another profit warning in August, with results revealing a lack of growth in the single-use gastrointestinal endoscope business despite substantial investment and an unexpected drop in the bronchoscope sales. New management announced a program of cost cuts to improve cash flow and promised a new strategy in November.

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Past performance is not a reliable indicator of future performance.

Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.

Daily performance data is based on the latest available NAV.

The Funds are sub-funds of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which is registered with Commission de Surveillance du Secteur Financier and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents and/or key information document (KID) in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the articles of incorporation and the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors. They can also be found along with a summary of investor rights in English at www.troweprice.com. The Management Company reserves the right to terminate marketing arrangements.

Please note that the Fund typically has a risk of high volatility.

Hedged share classes (denoted by 'h') utilise investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.

The specific securities identified and described in this website do not represent all of the securities purchased, sold, or recommended for the sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

Attribution Data: Analysis represents the total performance of the portfolio as calculated by the FactSet attribution model and is inclusive of other assets that that will not receive a classification assignment in the detailed structure shown. Returns will not match official T. Rowe Price performance because FactSet uses different exchange rate sources and does not capture intra-day trading. Performance for each security is obtained in the local currency and, if necessary, is converted to U.S. dollars using an exchange rate determined by an independent third party. Figures are shown with gross dividends reinvested.

Sources: Copyright © 2024 FactSet Research Systems Inc. All rights reserved. MSCI/S&P GICS Sectors; Analysis by T. Rowe Price Associates, Inc. T. Rowe Price uses the MSCI/S&P Global Industry Classification Standard (GICS) for sector and industry reporting. Each year, MSCI and S&P make changes to the GICS structure. The last change occurred on September 28, 2018. T. Rowe Price will adhere to all future updates to GICS for prospective reporting.

The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property and a service mark of Morgan Stanley Capital International Inc, ("MSCI") and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and is licensed for use by [Licensee]. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classifications makes any express or impIied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any or such standard or classification, Without limiting any or the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

©2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Citywire Data Source: Citywire – where the fund manager is rated by Citywire, the rating is based on the manager’s 3-year risk adjusted performance. For further information on ratings methodology, please visit www.aboutcitywire.com.