Fund Research: Europe’s Shining Stars

Morningstar OBSR reveals the top funds for investors seeking exposure to European equities

Muna Abu-Habsa 22 August, 2012 | 12:57AM
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The past few years have proved turbulent for European equities, but no more so than in the last year. After a promising start to the year where continental European equities rose by more than 9% in the first quarter (as measured by the MSCI Europe ex-UK Index), most of the gains were lost in the second quarter, with the index tumbling by nearly 8%.

A clear trend emerged in the first half of 2012: nearly any kind of risk cost fund managers and their investors. Going down the cap ladder hurt; many commodities hurt; emerging markets hurt.

Most managers are currently weighing up the possibilities of either a mid-cycle slowdown or the economy falling back into recession. Managers have generally been reducing the sector bets and bringing their funds closer to the benchmark until there is more clarity surrounding the macro environment.

Geographical awareness has also become more prevalent over the last year as markets have differentiated between countries with sovereign debt issues. Indeed, many of the funds that have managed to navigate these difficult markets have tended to be those with a more flexible approach and a macro-awareness.

In addition, while European equities have struggled, returns for mega cap, quality stocks have been generally robust. For example, more than half of the stocks in the EURO STOXX 50 and FTSE 100 indices generated positive returns. As a result, managers who sought safety in the larger-cap, financially-sound issues have had better fortunes.

Top-Performing European Equity Funds

For investors seeking exposure to European equities there are a number of solid European equity funds available:

Jupiter European Special Situations, Baring Europe Select, Henderson European Growth, BGF European, Blackrock European Dynamic, Neptune European Opportunities and IM Argonaut European Alpha are prime examples of funds which are rated highly by our analysts at Morningstar OBSR.

For investors, manager selection is exceedingly crucial as a large number of active fund managers investing in Europe have typically struggled to keep pace with their benchmarks over various time periods. Over the last one-, three-, five- and ten-years the average fund in the Morningstar Europe ex-UK Large-Cap Equity category has lagged the MSCI Europe ex-UK Index.

Jupiter European Special Situations

Jupiter European Special Situations has been managed by Cédric de Fonclare since 2005, offering investors exposure to an actively managed fund that typically favours companies with strong growth prospects and sustainable earnings.

While these types of companies constitute the majority of his portfolio, he has also shown himself to be highly pragmatic, taking advantage of turnaround situations and stocks that he believes have been too harshly discounted by the market.

De Fonclare also monitors macroeconomic developments and usually has a roadmap of where he believes the fund should be positioned depending on the economic environment. His awareness of risk and his pragmatic bottom-up approach stand out as key elements within his investment approach. He is also flanked by an experienced team at Jupiter, including Alex Darwall who is the manager of the Jupiter European fund. In 2011, and so far this year, the fund has benefited from the manager’s cautious positioning, characterised by an overweight in healthcare and underweight in financials where the manager has entirely avoided all eurozone banks.

Cohesive Culture at BGF European

The managers on board BGF European, Nigel Bolton and Zehrid Osmani, have worked together since 2005 and are supported by a well-resourced team of European analysts and fund managers at BlackRock.

The team has continued to show stability following Bolton’s re-organisation of it in February 2008 and it is clear that he has created a cohesive culture of sharing information and expertise.

The managers have a flexible approach to investing and look for companies with attractive medium- to long-term earnings power as well as restructuring and turnaround situations.

However, they do this while taking into account the overall risks, which include the current prevailing macroeconomic and stock market environment.

Since joining BlackRock, the managers have navigated the fund commendably through different market environments. Performance over their tenure has been strong and the fund has outperformed the index and Morningstar Europe ex UK Large-Cap Equity category average by a wide margin.

The managers caught the market rally in February 2009 by adding more risk and, in 2010, the fund’s bias toward luxury stocks and companies with exposure to emerging-markets growth provided a tailwind.

The following year proved more challenging as they entered the year with a more optimistic view of the world, however, the managers quickly repositioned the portfolio to reflect a more cautious stance and the fund still managed to seal the year ahead of its peers.

So far into 2012, the managers have continued to make market calls which are spot-on, namely bolstering their exposure to financials and adding cyclicality earlier on in the year before manoeuvring the portfolio back into defensive form just ahead of the market falls in the second quarter.

Henderson European Growth

Henderson European Growth is run by industry veteran Richard Pease, and experienced co-manager Simon Rowe. The fund typically exhibits a strong bias towards mid-cap European companies.

The investment style is essentially eclectic, based on investing in quality companies with sound businesses which are trading at attractive valuations relative to their growth potential.

The investment approach is likely to favour companies that are undervalued, out of favour or have genuine growth potential. The managers construct the portfolio with risk in mind and a strong focus on the potential downside of each investment.

While it is evident that investment decisions are made with capital preservation at the forefront, the fund will tend to underperform when mid-cap companies lag the market.

The managers have therefore suffered from a style headwind as racier, smaller-cap issues have struggled amid investors’ flight to arguably more stable, larger-cap companies.

Despite this, the fund has managed to hold-up well so far this year in the torrid environment for European equities, thanks to its managers’ focus on quality companies. The fund boasts an excellent long-term track record and the managers have proven to reward investors through time.

Baring Europe Select

Nick Williams has served his investors well since he took over Baring Europe Select in January 2005. He had joined Barings a few months earlier from Singer & Friedlander, where he worked for 11 years as head of the European desk, although his involvement in European equities dates back almost two decades.

We believe Williams has a firm grip on his European equity universe and he makes full use of his skills on this offering. We also like the manager’s rigorous stock-picking approach. The manager selects stocks from the bottom up, targeting companies with unrecognised growth opportunities.

In his search for these, he looks for high quality, well-run companies. He considers a stock’s value creation potential based on its cash flow generation and return on equity, which may have been underestimated by the market.

Moreover, he takes into account a company’s expected dividend growth. This is then complemented by various valuation metrics to help the manager in setting price targets. These add discipline to his process, particularly as Williams has a strict selling approach.

The manager’s preference for sturdier, quality companies then drives him to hold larger stakes in mid-caps relative to his smaller-cap peers. Williams has executed his process well over the years and he has shown he is capable of navigating both up and down markets relatively well.

IM Argonaut European Alpha

IM Argonaut European Alpha offers investors exposure to a concentrated portfolio of European companies.

It is managed using a flexible approach with the aim of delivering performance ahead of both the index and peers. The fund is run by Barry Norris, who together with Oliver Russ, set up Argonaut Capital Partners in 2005.

The fund is multi-cap with neither a value nor growth bias, but rather a pragmatic approach that seeks to identify companies which are likely to deliver earnings growth and are priced reasonably.

Since launching the fund the manager has demonstrated a thoughtful approach to investment with a deep understanding of the companies he owns and an awareness of the overall macro environment.

Norris has made excellent use of his experience and has shown that he has what it takes to capably navigate the fund in different market conditions. His performance in years when smaller companies were out of favour, such as 2008 and 2011, reflects his ability to add value across the cap scale.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barings Europe Select A GBP Inc4,805.11 GBP-0.47Rating
BGF European A2 USD214.33 USD0.28Rating
BlackRock European Dynamic A Acc1,048.74 GBP-0.40Rating
Janus Henderson European Gr A Acc348.21 GBP-0.57Rating
VT Argonaut European Alpha A GBP Acc394.19 GBP-0.39Rating

About Author

Muna Abu-Habsa  is a senior investment research analyst at Morningstar

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