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Europe offers many opportunities, but there is no single winning strategy. Although many investors have ignored the region in the recent past there are still some star performers.
Why has Europe slipped out of sight? I am as guilty as anyone in ignoring this region, rich in opportunity. I last reviewed Europe in April 2006. Since then the euro has approached parity with sterling and the fortunes of Europe’s diverse economies have fluctuated widely. But there has been money to be made.
The Investment Management Association (IMA) divides Europe into three, so far as funds are concerned—Europe ex UK, Europe including UK and European Smaller Companies. By far the largest sector is that of Europe ex UK, with 110 funds providing six-month performance figures to the end of 2009, compared with just 34 for the other two sectors combined. While I plan to concentrate on the largest sector, it is interesting to look at the others in parallel.
”Four funds that are in the top five over six months have a five-year record, yet three of them remain in the top 10 throughout all periods”
For example, the best-performing sector overall for the four time-frames reviewed would seem to be European Smaller Companies. The average fund outperformed the other two sectors on all but the three-year tables. But there it slumped to third, losing on average 4.4% of its value, while Europe ex UK delivered a positive outcome. And, of course, there are only 14 funds represented here—just 10 if you look back to those five years ago.
Europe, of course, is as diverse a group of nations as you are likely to find. Economies such as those freed from the Soviet bloc might be considered as emerging. Indeed, they have benefited from the drift of manufacturing capacity to lower employment cost areas. And there have been countries where progress has been startlingly swift, both within and outside the eurozone, only to find nemesis waiting around the corner. Iceland and Ireland spring to mind.
Many of the prominent investment banks and securities houses have been operating on a pan-European basis for research. This is understandable. Gradually, regulation, legislation and best practice in several areas, such as accountancy, have been moving closer together across the European Union (EU). The EU may still be an association of sovereign states, but Brussels is wielding more influence over how corporations behave. (article continues below)
Even so, there is no single strategy for investment managers that will deliver consistent outperformance. Look at the problems facing Greece and Italy, let alone those that Ireland is having to contend with. And these are all members of the single European currency club. Change is ever present, but there is little doubt that businesses cross borders with greater ease. Aldi, Lidl and Santander are familiar sights in Britain and there are many domestic companies that are prospering across the Channel.
The performance tables tell a story of significant consistency among the managers that deliver superior returns. Invesco Perpetual is top for the period it has had its European Opportunities fund available, but Fleming Family & Partners and BlackRock, both of which have funds in all the tables, stay close to the top as well. Only four funds that are in the top five over six months have a five-year record, yet three of them remain in the top 10 throughout all periods.
Looking at the broader picture, the same Europe ex UK funds continue to dominate, although Henderson’s European Smaller Companies fund joins the leaders, except for the three-year tables where it subsides to fourth quartile. And as for the longer-term numbers, Jupiter and Neptune both feature, but slip in the shorter time-frames, Neptune having two funds propping up the six-month tables, ranking 107 and 109.
The variation in performance is as great as in any sector. Over three years, the range between best- and worst-performing funds in the Smaller Companies sector is a return of 18% to a fall of 27%. The best-performing fund in the broader Europe ex UK returned more than 36% of profit during this period, while the last in the table still managed a positive performance—just.
The Europe including UK sector, which has 19 funds and 14 with a five-year record, delivers a more consistent range of performance. But the fact these funds appear not to lead suggests that including the domestic market adds nothing to the opportunities available to fund managers. While smaller investment portfolios might find these funds appropriate, for many the Europe ex UK or the Smaller Companies sector are the ones to include.
So much of the domestic market is focused internationally that geographic divisions, such as those represented in these IMA sectors, might not be relevant. However, Europe is a vast market and, so far as quoted companies are concerned, still far less developed than Britain or America, so ignoring it as an investor would be unwise. Being part of a Europe-wide investment organisation does not necessarily help the managers and the funds to follow are the consistent leaders.
