Investors looking to take a boost from the booming European market should consider the recently launched F&C European Small Cap ex UK fund, according to Brewin Dolphin head of research Ben Gutteridge.
European market’s beleaguered reputation as an investment destination has taken something of a turn in 2015 since European Central Bank (ECB) head Mario Draghi announced a huge quantitative easing programme and stocks began to rally more rapidly than at any time in the previous five years.
Gutteridge backs the £34m F&C European Small Cap ex UK fund as a good way to add further exposure to Europe, alongside greater risk, despite a very brief track record.
He says while it was only launched on 16 March, its co-managers – Sam Cosh and Lucy Morris – have demonstrated previous success running a similar strategy with the offshore F&C European Small Cap SICAV, which includes the UK in its mandate.
“An investment worth considering to help achieve additional return, alongside additional risk, is the F&C European Small Cap ex UK fund managed by Sam Cosh and Lucy Morris. The fund is our top European small-cap fund pick,” he said.
“On our review of the European ex-UK Small-Cap sector, Cosh and Morris stood out as a highly motivated and successful team, who still remain relatively ‘undiscovered’. The team have achieved top performance on their investment trust and pan-European small-cap SICAV while running the lowest levels of market risk and total volatility, key reasons why we chose to back the fund from launch.”
According to FE Analytics, the €453m F&C European Small Cap fund, which has been headed by Cosh since March 2011, has returned 88.81 per cent – more than double in the average return in its sector.
Performance of fund, sector and index since March 2011
Source: FE Analytics
In contrast no other fund in the IA European Smaller Companies Sector returned as much with the closest – the Lazard European Smaller Companies fund – almost 10 percentage points behind.
The new fund will also track the Euromoney Smaller Europe Index, which gained just 33.3 per cent over the same period. Cosh also manages the European Assets Trust.
European equity funds are the “darling” of retail investors at present with fund flows into the region continuing to grow, Gutteridge says, as a result of a whole ale move away from US stocks, which are broadly almost at historic valuations.
“It seems US equities are the major source of funding for this trade as richer valuations and concerns the stronger dollar will weigh heavy on earnings’ performance is triggering some profit taking. Given the added determination of the Fed to get started on rate hikes, despite the negligible threat of inflation and the recent weakness in labour market data, risks of a sell-off are increasing,” he said.
“Whether the Fed will be able to make their first hike in June, or whether it will have to be delayed to the end of the year, or even 2016, remains to be seen, however. But what is clear is that monetary policy is far easier in Europe, where the ECB has only recently begin its large scale quantitative easing programme.”
He says smaller companies are a geared play on the economic recovery, as they will see greater benefit than their larger rivals as the European recovery gains pace. Funds invested in this area also have greater scope to find bargains, as it has been off the radar for many investors.
“The small-cap universe in Europe is large and diverse with circa 2,500 companies. Active managers benefit from high levels of inefficiency in the market as the sell side community give significantly less coverage and attention compared to large and mid-caps. In addition, small-cap investment offers higher rates of growth, greater M&A opportunity, and size and liquidity premiums”
A recent FE Trustnet survey of leading fund buyers showed 34.38 per cent are most optimistic about Europe on the three-year view, with Japan getting the same score.
The F&C European Small Cap ex UK fund invests in the smallest 25 per cent of companies by market capitalisation in its benchmark, aiming to achieve long-term capital growth with the portfolio typically made up of between 40 to 60 stocks. Its holding are yet not available as the fund has not released its first factsheet.
The strategy will also likely be influenced by the philosophy and style of F&C’s pan-European equities team led by David Moss which collectively manages about £4bn.
The range includes the F&C European Small Cap fund, European Assets Trust, the F&C European Growth and Income fund and the F&C European Equity fund.
F&C European Small Cap ex UK has a clean ongoing charges figure of 0.97 per cent.