In recent years, technology stocks have been leading the rise in the U.S. stock market, outperforming most other stocks. However, one of the best-performing stock funds in Europe has managed to keep pace with the strong gains of U.S. tech stocks by purchasing some of the most undervalued stocks in Europe, without betting on companies like Nvidia (NVDA.US) or Apple (AAPL.US).

Compiled data shows that the European Value Fund by Brandes Investment Funds Plc has outperformed 99% of its peers over the past five years. The fund, which has assets of approximately €678 million ($742 million), primarily holds stocks such as Heineken, Sanofi, and UBS.

Co-fund manager Jeffrey Germain said the formula for success is to buy stocks whose share prices are significantly lower than their long-term valuations, a situation that arises either due to specific business issues or weak economic cycles.

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"We are looking for companies that have fallen out of favor, where we believe the long-term value is higher than their trading levels. We are not trying to ride the market's momentum, nor are we guessing about next quarter's earnings," Germain said in an interview.

Compiled data indicates that since hitting a pandemic-induced low in March 2020, his fund has soared by 173%, compared to a 189% rise in the Nasdaq 100 index over the same period.

British engine manufacturer Rolls-Royce is a successful example.

The company has struggled to recover from supply chain issues related to the COVID-19 pandemic, but a transformation plan led by the new CEO since the end of 2022 has driven a more than 450% rebound in its share price. When Germain's fund first bought the stock that year, it was trading near its lowest point in two decades.

"The company itself has also gone through some unique issues," he said, referring to Rolls-Royce, "but we believe the risks did not outweigh the opportunities."

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

Low exposure to large-cap technology stocksWhen artificial intelligence and large technology companies were all the rage in the financial markets, few European funds managed to outperform the broader market without significant exposure to technology companies. Compiled data shows that the benchmark Euro Stoxx 600 index lagged behind the S&P 500 index for 8 out of the past 10 years.

According to Brandes' situational statement, as of the end of August, the fund's holdings in information technology stocks accounted for approximately 3.7% of total assets, significantly lower than the benchmark MSCI Europe index. The highest exposure was in consumer staples and financial stocks, both sectors with price-to-earnings ratios below average.

Despite concerns recently expressed by several market strategists about the impact of declining interest rates on banks' net interest margins, Germain stated that his long-term confidence in the sector remains unchanged. "The valuations applicable to banks still seem too low, and we do indeed like the holdings in our portfolio."

Luxury goods are another area of focus. Stocks including Richemont Group, the parent company of Cartier, Kering Group, the parent company of Gucci, and Swatch Group have all felt the impact of weak demand in key markets. However, Brandes holds all three of these stocks, and Germain stated that he has increased the allocation to the sector more broadly—due to high valuations, the fund currently does not hold LVMH.

In the automotive sector, over the past quarter, most major European car manufacturers have issued profit warnings as the industry grapples with weak demand and competition, both of which are reasons Brandes has stayed away from the sector.

"You are in a negative cycle, which creates fertile ground for us, but it is not yet clear who will be the winners in the electric vehicle transition," Germain said.