Investors have generally not been rewarded for holding the most volatile active European equity funds following the financial crisis and the equity market bottom in March 2009, according to research by FE Trustnet.
European stocks have lurched from crisis to rally more than most other developed equities since 2008, with 2011 being the most recent material weak period thanks to the European sovereign debt crisis.
With the woes that emanated from this very much at the forefront of headlines today, it can be hard to remember the huge rallies in 2013 or at the beginning of the 2015 and easier to reflect on the 2014’s 13 per cent plunge and the last few months’ near double-digit correction.
Michael Stanes, investment director at Heartwood Investment Management, believes European stocks could be set for further weakness but is relatively positive on the asset class.
“Market risk levels will remain elevated, benefitting core government bonds markets and keeping equities volatile. But … this is not 2011 and we expect euro periphery contagion to be limited. As investors in European equities, we are overweight and added on weakness last week, while continuing to monitor developments closely.”
Looking within the IA UK Europe ex UK sector since March 2009 and using the maximum drawdown metric, we can see how much investors would have lost in a fund if they had been buying a fund at its high point and selling at its subsequent low point.
The fund with the highest maximum drawdown over this period is the €1bn HSBC GIF Euroland Equity fund, managed by Frederic Leguay, which fell 38 per cent in its worst period. Between the market’s bottom and now, it has returned 88.52 per cent.
It is not the only fund from HSBC to make it onto the list of those with high maximum drawdowns. The £234m HSBC European Growth fund, managed by Nick Dowell, has the fifth highest drawdown.
Both funds have returned less than the MSCI Europe ex UK index as well as the sector average from a total return point of view with the former bottom quartile and the latter third quartile.
Performance of funds, sector and index since March 2009
Source: FE Analytics
The £266m AXA Rosenberg European fund also makes it onto the list with the third highest drawdown of 32.38 per cent. It has failed to beat both the sector and benchmark with a return of 83.36 per cent since March 2009, putting it in the bottom decile for total returns.
Performance of funds, sector and index since March 2009
Source: FE Analytics
All the funds mentioned are also in the bottom quartile for annualised volatility over this period, suggesting investors in these funds have not only seen the biggest plunges but have greater movements than the average fund in the sector.
However, the exception is the Smith & Williamson European Growth fund, which has been top quartile since March 2009 with a return of 132.34 per cent despite its high volatility.
Performance of funds, sector and index since March 2009
Source: FE Analytics
The fund’s manager, Giles Worthington, only took over at the end of 2014, with most of the period under consideration in this article managed by Mark Pignatelli.
However Worthington has got off to a good start. In 2015, a period where for the most part European equity markets have rallied hard before falling considerably, Worthington has near doubled the index’s 4.8 per cent gain.
Philip Wolstencroft‘s Artemis European Growth fund has also stayed ahead of the sector and index despite having the fourth highest drawdown and the third highest volatility. The fund has returned 108.61 per cent, nudging it ahead of both sector and index.
Performance of funds, sector and index since March 2009
Source: FE Analytics
It was one of the funds to most rapidly bounce back from the falls of 2011 and 2012.
Schroders’ Marcus Brookes told FE Trustnet at the end of 2014 that he was looking to buy the Artemis European Growth fund to take advantage of an impending rally. This was well vindicated as quantitative easing was announced at the start of the year and stocks surged.
Brookes has used the fund in the past to play a specific role in his portfolios because of the fund’s previous swift gains in rising markets. However, it has subsequently offered very little protection when markets are weak.
The multi-manager said he invested in the fund when it launched in 2001 and owned it until 2007, selling on the basis that it was invested 40 per cent of its portfolio in banks, mostly Irish and Greek banks.
“It then massively underperformed and we bought back in in late 2011 and, again, the forecast was Draghi was about to do ‘whatever it takes’ but we had also seen Europe just start to bottom in terms of recession so it was pretty clear they weren’t going to let any more banks go bust,” he said.