Trouble ahead for Europe?
Against a backdrop of Brexit and high sovereign debt, European funds have had a problematic year
Brexit has been unavoidable for the past two years, dominating almost every aspect of British life. While the UK parliament has yet to vote on the deal (the original vote was 11 December but this has been postponed to an unknown date), approval of the proposed agreement remains uncertain. It is not just the UK which could be affected, but Europe as a whole.
Whether or not Brexit will spark a domino effect around the continent remains to be seen, although the likelihood seems low.
The true Brexit effect on European funds also remains to be seen as global markets have had a tough few months, but fund performance has been struggling over the past 12 months. The picture is different over a long-term period however.
Aside from Brexit, there have been other factors which have proved difficult to manage over the past few years. Greece still has the highest debt on the continent, with the country’s deficit sitting at 178.6 per cent of GDP. However, Italy has crept up in recent years and is currently at 131.8 per cent, Portugal’s debt sits at 125.7 per cent. The UK’s, for comparison, is 87.7 per cent, still one of the highest. Estonia has the lowest debt, amounting to just 9 per cent of GDP. Government debt for the eurozone currently sits at €12.5trn (£11.1trn).
Despite a challenging backdrop, over five years the average fund in Europe excluding the UK sector saw a 37.9 per cent return, but over the one year it is down to -8.6 per cent, as at 26 November.
The Investment Association requires to within the Europe ex UK sector to invest at least 80 per cent of their assets in European equities and exclude UK securities.
Funds can, however, invest up to 5 per cent (but no more) of the total assets of the fund in UK equities to allow flexibility for corporate actions.
The sector, which has 120 constituent funds from 74 providers, is the fifth largest in terms of funds under management, totalling £63bn (its Europe including UK counterpart has just £2.5bn FUM).
The latest figures from the IA show that net retail sales for September this year were £-10.8m, its fifth consecutive month of outflows. August data shows outflows of £258m, July saw £138m outflows while outflows hit £303m in June. However, the year started off positively in sales terms, when January saw inflows of £220m. The entire Europe space (which comprises the Europe ex UK, Europe including UK and Europe Smaller Companies sectors) saw £58m outflows in September.
Looking at a longer term investment horizon, it is unclear what markets will bring after the March deadline, but what is clear is many investors will have made solid returns over the past five years. The top performer over the time period is the Marlborough European Multi-Cap fund. Seeing returns of 89.7 per cent, it is also the top performer over three years, returning 60.46 per cent (17.1 per cent annualised).
Returns over one year tell a completely different story. In the 12 months to 26 November, just two funds saw positive returns, the Jupiter European (2.5 per cent return) and the Comgest Growth Europe ex UK fund (0.8 per cent). On a short-term investment, just the Polar Capital European (ex UK) Income fund saw a return over six months (0.3 per cent).
Funds in focus
Digging deeper into the funds
Stockmarkets have been under immense pressure in the last few months and funds in the Europe excluding UK sector have certainly not been immune. Here is a closer look at a selection of funds from the sector.
Largest fund: Jupiter European
Launch date: July 1987
Manager: Alexander Darwall
Fund size: £5.5bn
About: A concentrated portfolio of between 30 and 45 companies, this fund looks to invest for the long term and the management team seeks companies whose prospects depend as far as is “reasonably possible” on their own entrepreneurial endeavour and not on factors beyond their control.
Run by one of Jupiter’s longest-serving fund managers, it invests in expertise rather than taking a view on the geopolitical region and is not reliant on macroeconomic trends.
Top performer over five years: Marlborough European Multi-Cap
Launch date: May 1986
Managers: David Walton and Will Searle
Fund size: £400.3m
About: This fund invests predominantly in “transferable securities” of European listed and/or European domiciled companies.
It may at any time (at the managers’ discretion) use derivatives and forward transactions for efficient portfolio management.
The top performer over three and five years, the managers use a bottom-up process and analyse all 3,500 companies listed in Western Europe and keeps a focus list of 250 as potential investment opportunities. From then, the portfolio is constructed of more than 100 stocks.
Longest-running fund: Axa Rosenberg European
Launch date: February 1983
Managers: Gideon Smith and Cameron Gray
Fund size: £17.4m
About: This fund aims to achieve medium- to long-term capital growth on a three- to five-year basis using the MSCI Europe ex-UK index as a benchmark.
As per its top holdings, the fund invests in well-known European large-caps such as Roche, Nestle, Siemens and L’Oréal, but also invests in medium-sized firms. The investment team says it believes fundamentals, especially future earnings and the price paid for them, drive equity returns.
Most volatile over five years: Neptune European Opportunities
Launch date: October 2010
Manager: Rob Burnett, until end 2018, Thomas Smith to take over in 2019
Fund size: £308.7m
About: This fund has seen positive returns over three- and five-year periods.
Managed by Neptune’s investment director and head of European equities, the fund invests in between 40 and 60 “undervalued companies with strong growth potential”, but the manager has freedom to rapidly adjust the portfolio in line with prevailing market conditions.
Most changes to top 10 holdings over one year: Schroder European Alpha Plus
Launch date: October 2003
Manager: James Sym
Fund size: £316.8m
About: According to FE market movements data, this fund has changed the most within its top 10 holdings over the past year. But this may not necessarily be a negative, given the current market conditions.
New additions to the top 10 include Spanish telecoms giant Telefonica and insurers Axa and Grupo Catalana Occidente. The fund typically holds between 35 and 60 companies in which the manager has a high conviction the share price does not reflect the prospects of that business.