The programme will involve buying €60bn of assets including government bonds each month and while an end date has been pencilled in for September 2016, the central bank has pledged to keep pumping stimulus into the market until there is a “sustained adjustment in the path of inflation” – which fell into negative territory last month.
All told, the QE programme will be sized at least €1.1trn - much larger than the €500bn that was being expected by investors – and this package has been positively received by investors with many suggesting it will have the desired effect of re-invigorating economic growth.
Nevertheless, there are still a number of market commentators who warn that the QE won’t “eliminate the risk of a prolonged and damaging bout of deflation”.
Therefore, in this article FE Trustnet looks at both the European funds which could take advantage of a snap rally – as a result of their positioning and performance in recent strongly rising markets – and those which have good history of protecting capital – if the stimulus doesn’t have the desired effect.
European equities have already reacted very positively to the news, but investors don’t have to look back too far to see the last time the ECB caused a bull-run in the market.
Following the intensification of the sovereign crisis and fears over the possible break-up of the eurozone, Draghi reassured the market that he would do “whatever it takes” to save the euro in the summer of 2012, which caused risk assets to soar.
Between the speech in June 2012 and the US Federal Reserve’s comments about the plan to ‘taper’ QE in the US that caused sell-off in May 2013, the IA Europe ex UK sector was the second best performing sector in the universe.
According to FE Analytics, over that 11-month period the average fund in the sector returned a hefty 46.29 per cent. What is even more extraordinary is that the sector’s worst performing fund over that time – Oliver Russ’ £70m FP Argonaut European Enhanced Income fund – still returned 35.42 per cent.
During that rally, the three best performing funds were Scot Wid HIFML European Strategic, Artemis European Growth and Invesco Perpetual European Equity Income which gained 66.59 per cent, 59.17 per cent and 56.92 per cent respectively.
Performance of funds vs sector between Jun 2012 and May 2013
Source: FE Analytics
While it is always interesting to look back at the past and though parallels can be drawn between then and now, it must be pointed out that it is no guide to future returns.
One aspect we can look at, however, is which funds are currently geared for a period of increased appetite for risk in the European market by either being overweight cyclical stocks or holding a high proportion in the bombed-out peripheral markets.
One fund which is very geared into a possible rally is Neptune European Opportunities which is headed up by FE Alpha Manager Rob Burnett, who told FE Trustnet last month that eurozone QE would cause the equity market to rally.
“Europe is one of the cheapest places on planet earth right now. This is really nice to know because when you are thinking of allocating money into a market with a 10-year view, you know that if you have very cheap valuations, it massively increases the probability of good returns,” Burnett (pictured) said.
The £580m fund’s two largest sector exposures – which are both overweight positions relative to the benchmark – are financials and basic materials. On top of that, Burnett has 31 per cent of his fund in Italy, which is the largest weighting in the sector, while at 10 per cent Spain is his third largest regional position.
Neptune European Opportunities has already had a barnstorming start to 2015 as his stocks have rallied on the back of the initial anticipation and actual announcement of QE. It has topped the sector so far this year with a 5.47 per cent rise.
Performance of fund versus sector and index in 2015
Source: FE Analytics
It is also a decent long-term performer as, according to FE Analytics, it has been a top quartile performer with returns of 152.02 per cent since Burnett took charge, beating its MSCI Europe ex UK benchmark by 50 percentage points in the process.
It’s not for the faint-hearted, however, as it can go through periods of sustained underperformance as shown by its bottom quartile numbers in 2012, 2013 and 2014.
Another fund which is in good position to take advantage of a possible rally include James Sym’s Schroder European Alpha Income fund, which is overweight financials, Italy and Spain. The manager is also underweight some of the most popular, but defensive, European stocks like Novartis, Nestle and Sanofi.
FE Alpha Manager Marcus Brookes recently told FE Trustnet that he would be buying Philip Wolstencroft’s £250m Artemis European Growth fund when European equities showed signs of bottoming, as it has “leverage back into the mean reversion”.
Wolstencroft holds three financial services firms, two banks and an automotive company in his top 10.
While the implementation of QE by central banks has usually led to a rally in equity markets, it is not a foregone conclusion so investors may be interested in European funds which have performed well when the sector has struggled.
The last time European stocks fell considerably was when concerns over the possible break-up of the eurozone rose dramatically in July 2011 up until Draghi calmed the market in June 2012.
According to FE Analytics, the average fund in the sector fell 23.51 per cent over that time.
Every fund in the sector posted double-digit losses during the sell-off, but two of the best performers were FE Alpha Manager David Dudding’s Threadneedle European Select fund and FE Alpha Manager Alexander Darwall’s Jupiter European fund, which fell 12.36 per cent and 14.71 per cent respectively.
Both funds are five crown-rated and the managers are renowned for focusing on high quality businesses with reliable earnings.
Over a longer time frame, a number of funds have shown a decent ability to defend capital. Looking over five years, which incorporates both strongly rising markets, four funds – Threadneedle European Select, Jupiter European, Baillie Gifford European and Henderson European Focus – stand out in terms of their capital preservation characteristics.
Performance of funds versus sector and index over 5yrs
Source: FE Analytics
All four funds have been top quartile for their returns, but also for their annualised volatility, downside risk, maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – and Sharpe ratio, which calculates risk-adjusted returns.
However, it isn’t very likely that an investor would buy a European fund if they thought European equities were about to go through a difficult period. Therefore, in an article next week we will highlight the global funds which are largely avoiding the European market.
