Fidelity European equity fund manager Marcel Stotzel is tapping into the digital world for real world returns, as he believes the growth of the ‘metaverse’ will help Europe close the technology gap with the US.

The US has been at the forefront of the technology boom but Stotzel believes a new cycle in the sector can be led by innovative European companies that are working with the metaverse, a virtual version of the real world in which people can interact, socialise and, importantly, consume.

Stotzel, who is co-manager to Citywire A-rated Sam Morse on the £3.5bn open-ended Fidelity European fund and the £1.4bn Fidelity European (FEV ) investment trust, said innovation linked to the virtual world will help Europe birth big tech names over the next decade.

‘The metaverse is a digital world that combines online and augmented reality (AR) or virtual reality (VR). You are a digital person in a digital world,’ he said.

The metaverse – which inspired Facebook’s rebrand to Meta Platforms last year – has hit financial headlines in recent weeks as the value of ‘non-fungible tokens’ (NFTs) has tanked alongside cryptocurrencies, which they are typically purchased using. NFTs are digital entities that could be anything from artwork to shoes, which are purchased for use in the buyer’s digital life.

Although there has been much talk around crypto and NFT scams, and trouble in the markets that deal in them, Stotzel said ‘the trend for digital living and environments is here to stay. The things that people do in real life are being transferred online.’

He is hoping not to benefit from NFTs directly but from what she called the ‘spill over’ from the growth of the metaverse.

Luxury brands such as LVMH Louis Vuitton – a top 10 holdings in both the fund and trust – are an area where Europe is a clear leader and these high-end designer brands could see a huge uplift in revenues from the digital universe over the coming decade.

Stotzel noted Balenciaga, which is owned by Paris-listed Kering, has a metaverse store and Louis Vuitton has created tokens that you can get for free and exchange for outfits.

‘This is in the very early stages it is will take five-to-10 years for [digital revenues to come through] but the fact is Europe is at the forefront of that,’ he added. 

The manager cited a report by Morgan Stanley that said by 2030, a quarter of the luxury goods market could be digital, with brands making near 100% margins as they do not actually need to manufacture any physical goods. Particular take-up is expected among young consumers who have grown up in a digital world.  

‘If you think Hermes couldn’t make any more money on a £10,000 bag, they can when they don’t have to physically make the bag,’ he said.

‘There is a demand for digital assets – clothes, cars homes and that is not going anywhere. There is demand for people to dress nicely and in a cool way in real life and that transfers to the metaverse.’

While the business-to-consumer (B2C) element of the metaverse is important, Stotzel believes Europe will close the tech gap with the US on the business-to-business (B2B) side of the digital environment.

‘The consumer has been mined by tech for 20 years and it is now difficult [to find new opportunities] but with B2B you are picking gold nuggets from the surface,’ he said.

‘The US will always lead [the tech sector] but the gap will not be as wide in the next decade.

‘If you look at the last decade it was driven by B2C companies like Apple, Amazon, and Netflix – that is where the US has leadership. Where Europe is strong is B2B.’

Europe’s business edge

Next generation winners from the growth of the metaverse and the switch in the ‘tech cycle’ from B2C to B2B could include holding Dassault Systèmes.

Dassault provides CAD software that is used to accurately design 3D cars and planes, modelling in scenarios to see how they perform under different environments and pressures.

‘It is ahead of its time and it has been doing “metaverse” since before it was a word,’ said Stotzel.

‘If the next Tesla wants to be in the metaverse, then it’s clear that Dassault Systèmes will be the underlying designer.’

Similarly, Dutch semiconductor equipment maker ASML should benefit from the increased computer power that will be needed. 

‘If you look at the power needed to model a whole world and power augmented reality, that has an impact,’ said Stotzel.

‘ASML Is selling the kit. It has the monopoly on that market and will benefit from the raw power needed to drive the digital world.’

Over the past year, the fund has declined -4.3% but it has outperformed peers in the Investment Association Europe ex-UK sector, where the average portfolio is down 7.8%. The fund also has a leading record over five years, delivering 37.4% versus the 15.2% sector average. 

The trust’s net asset value is down 6.6% over one year and the share price has dropped 8.7% over the year, leaving it trading at a discount of 9.1%.