However, manager Raj Shant says performance is starting to recover as governments progress with their deleveraging efforts.
The latest factsheet shows the fund lost 2.49% over the three years to December 31 against the IMA Europe excluding UK peer group’s 9.23% gain.
Meera Patel, a senior analyst at Hargreaves Lansdown, says this underperformance is “disappointing” for an actively-managed fund.
“Despite the occasional glimpse of improved performance, the fund has been inconsistent,” she adds. “Our analysis shows that stock selection has been the main driver of underperformance.”
Patel also highlights stock selection in the consumer goods, financials and oil and gas sectors as weighing on performance.
Financials is the fund’s largest sector allocation, accounting for 22.6% of the portfolio. Allianz and UBS can be found in the fund’s top-ten holdings.
The oil and gas industry is the portfolio’s fourth largest sector allocation, with Total and ENI Spa included in the top-ten holdings, while consumer goods is the fifth largest allocation, headed by a position in Siemens.
Shant says the fund performed strongly relative to its peers during 2007 and 2008, as it was positioned to account for “the dangers of excessive debt accumulation” that had built up in the market.
However, Shant says from March 2009 he “underestimated” governments’ denial of the need to deleverage and the impact this would eventually have on the market and economic behaviour.
“Instead of deleveraging, the major Western economies actually took on more debt as government borrowing replaced private sector borrowing to sustain economies. With zero interest rates, savers and companies with strong balance sheets and cashflows were actually penalised, whilst debtors were effectively rewarded,” the manager says.
“Our sector positioning and our stock selection were heavily penalised over that period.”
Shant adds that performance on the fund has started to turn around, as evidenced by its overperformance during the second half of 2011, and predicts market conditions will start to favour stocks with strong balance sheets in the coming years.