(Bloomberg) — One of Europe’s best-performing equity funds has matched the steep gains of US tech without betting on the likes of Nvidia Corp. or Apple Inc. — instead by buying some of the region’s most undervalued stocks.

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Brandes Investment Funds Plc’s European Value Fund, which has about €678 million ($742 million) in assets and counts Heineken Holding NV, Sanofi SA and UBS Group AG among its top holdings, has beaten 99% of its peers over the past five years, according to data compiled by Bloomberg.

The winning formula, co-fund manager Jeffrey Germain says, is buying stocks that are trading well below long-term valuations, either due to specific issues with the business or because of a weak economic cycle.

“We’re looking for businesses that are out of favor, where we think the long-term value is above where they’re trading,” Germain said in an interview. “We’re not trying to play the momentum aspects of the market or guess where earnings are going to be next quarter.”

His fund has surged 173% since hitting a pandemic-driven low in March 2020, according to data compiled by Bloomberg. The Nasdaq 100 has rallied 189% over that time.

One example of a big bet that paid off has been UK engine maker Rolls-Royce Holdings Plc.

The company struggled to recover from Covid-related supply chain issues, before a transformation program led by a new chief executive officer fueled a more than 450% recovery in the shares since the end of 2022. Germain’s fund first bought the stock that year, when it was trading near a 20-year low.

“The business itself had been going through a number of idiosyncratic issues,” he said, referring to Rolls-Royce. “But we thought the risks were not outweighing the opportunity.”

Rolls-Royce declined to comment on its share price rise.

No Big Tech

At a time when artificial intelligence and Big Tech has been all the rage in financial markets, it’s been rare for a European fund to outperform without much tech exposure. The benchmark Stoxx Europe 600 Index has trailed the S&P 500 Index in eight of the past 10 years, according to data compiled by Bloomberg.

Information technology accounted for about 3.7% of the Brandes fund’s total holdings as of end-August, considerably lower than the benchmark MSCI Europe Index, according to its fact-sheet. Consumer staples and financials had the highest exposure — both sectors with below-average price-to-earnings valuations.

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While several market strategists have recently voiced concerns about an impact on banks’ net interest margins as rates fall, Germain said his longer-term conviction in the sector remains intact. “The multiple being applied to banks still looks too low and we do like the holdings in the portfolio.”

Luxury goods are another area of focus. Stocks including Cartier owner Richemont SA, Gucci parent Kering SA and Swatch Group AG have felt the impact of weaker demand in key market China. All three are held by Brandes, and Germain said he had increased allocation to the sector more broadly — although the fund currently doesn’t hold LVMH because of high valuations.

One sector still out of favor is autos — Europe’s cheapest sub-index.

Most major European carmakers have issued profit warnings over the past quarter as the industry struggles with sluggish demand, including in China — from where firms also face competition on electric vehicles. Both are reasons for Brandes to stay away.

“You’re in a cycle that is negative, which creates fertile ground for us, but it’s not clear who the winners of EV transitions are going to be,” Germain said.

–With assistance from Siddharth Philip.

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