23 Aug 2019
Despite the government’s attempts to extricate the UK from the EU membership, as investors we remain inextricably linked to our continental neighbours.
A typical 60% equity mixed asset portfolio might feature 10% exposure to European (ex-UK) equities, so managers have had plenty to play for as Gatekeepers have continued to tick the European box on their asset allocation list.
Fishing in the same pond
Fund selectors clearly have their favourites: FP Crux European Special Sits (28, +5 since last quarter), BlackRock European Dynamic (28 picks), BlackRock Continental Europe Income and handful of Quilter funds. These funds have certainly produced performance beyond their benchmarks for a number of years, however they’re all fishing in the same pond, in the sense that the ex-UK benchmarks they reference – FTSE World Europe, Developed Europe and MSCI Europe – are heavily biased towards the largest companies from 14 countries, with a median capitalisation of around €5bn.
PASSIVE AND ACTIVE OPTIONS
Passive adherents recognise this which is why Vanguard’s Developed Europe ex-UK tracker has gathered 14 picks, but sits just outside the top 10. The fact that the fund has comparable returns relative to the sector average over one and three years, demonstrates that in the round managers are sharing the same benchmark and are therefore often focused on the same companies, making it difficult to produce the excess returns that differentiate performances and demonstrate value versus the active fee premium charged.
Of Gatekeepers’ favourites, the standout performer from this group is Jupiter. Its European fund is fifth for three-year returns and 7th over one year. None of the other gatekeepers’ favourite funds are in the top ten funds for one or three-year returns.
Of course, experience tells us that there are funds that are contributing significant alpha with regularity, but whose brands may be less familiar as they have less marketing clout. The European ex-UK sector is no exception. LF Miton European Opps (6) is a £500m fund focused on 50 stocks, with a bias towards medium-sized companies. It has delivered the highest cumulative alpha over one and three years of all the funds in this sector and yet it;s still not getting much action from gatekeepers.
Meanwhile, other less well-known brands that have historically delivered strong numbers have fared less well in 2018. For example, Marlborough’s European Multi-Cap fund (6) saw its strong bias towards smaller companies penalised in 2018, due to a number of factors that may have rather less to do with company fundamentals.
This view is supported by the fact that defensive stocks have done rather better than their earnings numbers might suggest, implying investors might be focused rather more on macroeconomic factors like interest rates and bond yields than earnings and profits. Nonetheless, Marlborough has held its own with three-year returns that rank it seventh for the sector overall.
Other names worthy of mention include Aberdeen, which has two funds in the top three for returns, and Jupiter, which is one of those increasingly rare breeds in our universe – a longstanding fund with good performance and lots of gatekeeper picks.
Whether we crash out of Europe or not, European companies will continue to be indispensable constituents of a diversified equity portfolio. Currently depressed prices may offer investors a significant opportunity in 2019 and beyond.