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Kira Nickerson: Too often Europe is the kneejerk sell

Retail investors are avoiding Europe as the majority of funds in the three IMA sectors have experienced outflows over the past three and six months.

Yet despite the recent state of European equity markets brought on by the deteriorating sovereign debt crisis, several portfolios exposed to continental equities have made investors money this year. Not unexpectedly, several are absolute-return mandates but a few long-only portfolios in the IMA’s three European sectors have also made gains.

According to FE analytics data over 12 months to October 31, 17 European long-only equity funds out of 166 across the three sectors have achieved positive gains before charges.

The top return is from JOHCM European select value, with a gain of 4.86 per cent, followed by Threadneedle’s European smaller companies at 4.4 per cent.

Threadneedle accounts for five of the 17 funds in positive territory over one year. A sixth fund lies just outside the elite few with negative returns of -0.87 per cent over the year.

Over the more volatile six months to end of October, the performance of European long-only funds is less positive. The top return over this shorter timeframe has fallen by 6.63 per cent for Neptune European income. However, within the absolute return sector over that period, Liontrust European absolute return and Blackrock European absolute alpha both made gains of more than 5 per cent, ranking among the top five best performers in that peer group.

How quickly investors have turned on European portfolios is highlighted by Threadneedle smaller companies’ fall from one of the few European funds attracting assets over 12 months to one of the bigger losers over six. Looking at FE’s money activity data across the unit trust and Oeic universe over the past six months, the Threadneedle portfolio has dropped from £1.1bn in assets to £917m, £155m of which was due to performance and the remainder down to outflows.

Across the European sectors, however, Henderson European selected opportunities has fared the worst. The fund has shed £400m over six months, £247m of which was down to performance, according to FE. Next is Threadneedle European, which lost £98m, followed by Neptune European opportunities, down from £1.23bn to £976.6m in size.

Based on FE statistics, there are 36 funds across the three IMA European sectors that have attracted money over the past six months. Standard Life Investment European equity income has drawn the most, taking in £240m over that timeframe. This helped offset the £119m it lost due to performance. Next highest has been Blackrock’s European dynamic fund, with £157m in inflows.

The data is backed up by Cofunds figures that show Blackrock dynamic as one of the best European sellers on its platform so far this year and over the past three months. According to the platform, the IMA’s European sectors have overall been in outflow territory. The European ex-UK sector accounted for -3.1 per cent of Cofunds net sales in October and -1.1 per cent year to date. Among those seeing inflows are three index trackers, from SSgaA, L&G and HSBC. Not counting Blackrock Dynamic, the remaining six active funds selling well over the past three months include Jupiter European, Henderson European special situations, Blackrock continental European, Jupiter European special situations, Cazenove European and Schroder European Alpha plus.

The outflows are not so surprising considering all that has been happening on the continent. It is perhaps more of a surprise that any European funds are drawing in money at all. On November10, the European Commission downgraded its growth forecasts for the region to a 0.8 per cent for 2012. However, many fund managers and economists are gloomier than this and are predicting a European recession.

Azad Zangana, European economist at Schroders, says: “Events over the past few weeks have been extraordinary. The latest escalation in the sovereign debt crisis has led us to reassess our economic forecasts. We believe the outlook for the eurozone economy is now significantly more negative and that politicians have missed their opportunity to prevent a European credit crunch.”

Still, as fund managers have often commented, the state of an economy is very different to corporate health and outlooks, with many viewing recent sentiment-driven falls as buying opportunities.

Despite this, the speed of bad news and gloomy outlooks for Europe mean it is understandable investors are shying away from the region but the truth is it does not normally take much stress or crisis at all for UK investors to dump European funds. The sector is consistently one retail investors run most hot and cold on.

IMA figures for 2011 show Europe was the worst retail seller in August, June and April and the second worst seller in September (European smaller companies).

Yet the pattern is not unique to this particular Europe-focused crisis. From 2001 to 2010, the European ex-UK sector on its own was the worst seller in five separate years: 2003, 2004, 2005, 2008 and 2009. No other sector comes close to beating that record. In fact, no other peer group has even achieved more than one bad year.

Such a negative sales record could lead to the conclusion that performance in the European peer groups must be horrid and volatile. However, this is one time when it seems past performance seems irrelevant when it comes to popularity or, rather, unpopularity. FE data shows that over 10 years, the sector average of the three European sectors has generally fared better than the managed sectors, Japan and North America funds. European smaller companies and Europe ex-UK funds beat them all. Europe including UK funds were beaten by the average returns in the active and balanced managed areas, up by 54.29 per cent compared to 55.40 and 54.72 respectively.

There is no denying Europe is a mess right now and currently presents difficulties in justifying why investors should hold on. However, too often Europe is just a kneejerk sell when, in reality, opportunities and good performance can be found.

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