Williams and his team had held very little in Europe as they favoured the US equity market last year – a region that performed strongly as it returned close to 20 per cent in 2014.
Performance of indices in 2014
Source: FE Analytics
Last year was a very poor one for European investors – as the graph above shows – as due to economic weakness and deflationary pressures, a record amount of money was taken out of the market from international investors.
However, Williams – who is an investment manager at the group – says there are a number of reasons why now is a perfect time to buy into the market.
He points to a weaker euro, which should boost corporate earnings, cyclically adjusted P/E ratios well below their historic averages and at a record discount to the US, and full scale QE – which should, like in the US before it, drive the market higher – as reasons to be bullish.
He has therefore targeted more cyclical funds for his exposure.
“As the European economy improves and earnings recover from trough levels, we would expect funds which are biased towards cyclical, industrial and financial stocks to perform the strongest,” Williams (pictured) said.
“Our increase in European equity weightings was therefore biased towards funds which are generally overweight sectors where earnings and profit margins are depressed and where we believe improving economic data will support a meaningful recovery in earnings.”
He added: “This mainly includes, for us, Argonaut European Alpha and Schroder European Alpha Plus and, to a slightly lesser extent, Alister Hibbert at BlackRock.”
The £480m Schroder European Alpha Plus fund had been managed by Leon Howard-Spink until June last year when James Sym – who had built up a decent track record on the Cazenove (now Schroder) European Alpha Income fund – took charge.
Sym has positioned his portfolio for a bull market as his largest sector weighting – which represents an overweight position relative to its benchmark – is to financials. Sym also has big bets on automotive companies like Renault and is overweight regions such as France, Italy and Spain but is underweight Germany.
This positioning meant the fund struggled last year and means that since Sym took over, Schroder European Alpha Plus has underperformed against both the IA Europe ex UK sector and its FTSE World Europe ex UK benchmark with losses of 0.87 per cent.
However, as a recent FE Trustnet article highlighted, the fund has taken full advantage of the recent spike and is currently top decile so far in 2015 with returns of more than 10 per cent.
Performance of fund versus sector and index in 2015
Source: FE Analytics
FE Alpha Manager Barry Norris’ £290m FP Argonaut European Alpha fund is also positioned for a recovery.
Our data shows Norris is overweight consumer discretionary, industrial, technology and financial stocks. He also has big off-benchmark bets on countries such as Italy and Ireland, but is steering clear of more economically robust countries such as Germany and Switzerland.
However, unlike Sym’s fund, FP Argonaut European Alpha has underperformed so far this year as its returns of 5.91 per cent are behind those of the sector and its benchmark, the MSCI Europe ex UK index.
Nevertheless, FE Analytics shows Norris’s fund has been the fourth best performing portfolio in the sector and has comfortably beaten the index since its launch in May 2005 with returns of 196.18 per cent.
Performance of fund versus sector and index since May 2005
Source: FE Analytics
The fund has outperformed in six out of the last eight full calendar years since its launch, turning in top quartile returns in five of those years.
Williams’s final acquisition, FE Alpha Manager Alister Hibbert’s BlackRock European Dynamic fund, had been soft-closed but re-opened to new money in August last year.
The £1.6bn portfolio, which has a stated capacity of £2.5bn, has also outperformed both its sector and benchmark in this year’s rising market with returns of 8.32 per cent, but is a slightly different looking portfolio to the previous two funds mentioned as Hibbert is overweight healthcare and consumer services.
It has also comfortably outperformed since Hibbert took charge in March 2008 as it has been the sector’s second best performing fund with returns of 120.05 per cent, beating the FTSE World Europe ex UK index by close to 80 percentage points in the process.
Performance of fund versus sector and index since Mar 2008
Source: FE Analytics
While Williams is bullish on Europe and says the European sector is home to a number of high quality managers, he warns that investors may need to careful with their exposure.
“In our opinion, valuations on high quality ‘defensive growth’ companies, such as beverages and consumer goods (Nestle, Unilever, Anheuser Busch) remain expensive but, as we move towards late cycle, we will be looking to add more ‘defensive growth’ funds that should typically perform strongly during this phase.”
FE Alpha Manager David Dudding’s £2.4bn Threadneedle European Select is an example of an IA Europe ex UK fund which counts Nestle, Unilever and Anheuser Busch as top 10 holdings.
Williams continued: “However, given the eurozone remains earlier in its recovery than both the UK and the US, trading at trough valuations on trough earnings, our preference is for companies more correlated with improving European fundamentals.”
Nevertheless, the investment manager says he won’t be afraid to be very active with his European exposure as he warns investors to keep a close eye on flows into the region.
“My one concern is that US investors and multimanagers also make this call and just buy Europe via passive or ETFs which will just drive up the prices of the already expensive stuff at the top of the index,” he said.
“But, it should really be a good time for stock picking managers like Sym, Barry Norris and Hibbert.”
Schroder European Alpha Plus, FP Argonaut European Alpha and Blackrock European Dynamic all have ongoing charges figures of 0.9 per cent.