109 out of 300 funds in the IA Global and IA Global Income sectors are overweight in Europe versus the MSCI AC World index and a further nine funds hold more than twice its weighting, according to data latest FE Trustnet study.
The research was prompted by a noticeable increase in the popularity of European equities over recent months – reasons that have been listed for this include accommodative monetary policy, cheap valuations compared to the US and significant growth prospects.
In fact, a recent FE Trustnet poll showed that Europe was the region our readers were most bullish on heading into 2016.
Europe and Japan have been the investment darlings of recent years, although in the first half of 2015, strong performances from indices across the globe led to investors branching out more and opting to invest in a wide variety of regions.
However, the choppy market conditions experienced worldwide from the latter half of 2015 onwards, caused by dropping commodity prices and China’s growth slowdown, have seemingly led investors to return to their two favourite markets.
Santander’s Tom Caddick and Toby Vaughan told FE Trustnet earlier this week that they were bullish on European equities for the whole of 2015 and remain positive on the region this year, too.
“We like Europe and we like Japan because they have a better earnings environment, more accommodative policy and more attractive valuations versus the US,” Vaughan said.
“In terms of improving economic momentum this is more relevant to Europe than Japan.”
Out of the 300 funds in the IA Global and IA Global Equity Income sectors, FE Trustnet compiled two composite portfolios of the 20 funds with the largest weighting in Europe and the 20 funds with the smallest weightings. All funds included in the study have had their current manager at their helm for a minimum of three years.
Interestingly, the composite of funds with the largest European weighting outperformed by 4.42 percentage points with an average total return of 10.81 per cent.
Performance of composites over 3yrs
Source: FE Analytics
As with all composite portfolios though, there will still be funds with large European weightings that are dragging performance down and it must be noted that these are only small proportions of the entire sector. Which of these funds with hefty weightings in Europe really are being powered by this popular market, and which ones haven’t fared so well?
In terms of household names, first up is Artemis Global Income, which has a regional weighting in Europe ex UK of 39 per cent.
It has been headed up by Jacob de Tusch-Lec since its launch in 2010 and, over this time frame, it has provided a total return of 82.91 per cent, outperforming its average peer in the IA Global Equity Income sector and its MSCI AC World benchmark by 31.28 and 31.99 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Despite its strong long-term performance, the four crown-rated fund has underperformed over the last one, three and six months, which the manager attributes to the team’s “modest de-risking” of the portfolio during the second half of 2015.
“Clearly, there is value in energy, miners and emerging markets but the uncertainties are so great that this is not the time to take outsize risks,” de Tusch-Lec said in his latest update.
“Indeed, the volatility since New Year suggests having little exposure to the cyclical areas of emerging markets was the right stance to take.”
The £2.9bn fund has a clean ongoing charges figure (OCF) of 0.84 per cent and yields 4.07 per cent.
Also in the IA Global Equity Income sector, the fund with the next-largest European allocation is Invesco Perpetual Global Equity Income, which is managed by Nick Mustoe.
The fund holds a 35.44 per cent weighting in Europe, 28.79 per cent in North America, 24.53 per cent in the UK and smaller weightings in the Pacific Basin, Japan and Australasia.
Over Mustoe’s three-year tenure, the fund has provided a total return of 26.27 per cent, outperforming its sector average by 4.36 percentage points. It has also achieved an above-average Sharpe ratio, which measures risk-adjusted performance, and maximum drawdown, which measures the most money an investor would have lost if they’d bought and sold at the worst possible times, over the same time frame.
Mustoe’s Global Equity fund is also high up on the list for its 30.6 per cent weighting in Europe and has achieved an above-average max drawdown and Sharpe ratio since the manager has been at the helm.
Despite outperforming its average peer by 3.81 percentage points over five years with a 24.32 per cent total return, it has underperformed over one and three years as well as over the last three and six months. However, it must be noted that the fund holds a handful of ‘turnaround’ value stocks and taking such a strategy has been harmful to returns over recent years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The manager’s process is entirely driven by stock selection and, despite holding some stocks Mustoe deems to be undervalued, he has a focus on companies that offer sustainable growth and cash generation prospects.
Invesco Perpetual Global Equity Income yields 3.55 per cent and has a clean OCF of 0.92 per cent, while Invesco Perpetual Global has a clean OCF of 0.92 per cent and yields 1.52 per cent.
Sandwiched between the middle of these two funds is the two crown-rated Legg Mason IF Clearbridge Global Equity Income fund, which has underperformed its sector average over one, three and five years. Its recent underperformance is partially a result of being overweight the UK and materials sector as well having an underweight in healthcare, according to the team in their December 2015 report.
The £28m fund, which has a 33.05 per cent weighting in Europe ex UK equities, is headed up by Paul Ehrlichman, Safa Muhtaseb and Sean Bogda and has a clean OCF of 1.03 per cent and a 3.2 per cent yield.
Following the theme of turning to Europe in the hunt for yield is Veritas Global Equity Income, which has a 30.5 per cent weighting in Europe. The £1.4bn fund has been co-run by FE Alpha Manager duo Andy Headley and Charles Richardson for the last 11 years and has comfortably outperformed both its average peer and benchmark over the last decade.
Over the shorter term though it has underperformed and is in the bottom decile over three years with a 3.76 per cent loss compared to its MSCI World index’s positive return of 24.16 per cent.
Despite this, research from FE Trustnet last year found that the fund was the third most popular non-UK income fund to have as a top 10 holding among multi-managers.
One contributing factor to its underperformance is that it is highly value-orientated and is therefore significantly underweight the US, which has performed strongly over recent years.
Veritas Global Equity Income has a clean OCF of 1.16 per cent and yields 4.2 per cent.
Stewart Investors Worldwide Sustainability holds the next-largest weighting in Europe at 30.5 per cent, and is managed by Nick Edgerton and FE Alpha Manager David Gait.
While Gait has run the fund since 2012, Edgerton joined two years later and, over the time that they have both been at the fund’s helm, it has more than doubled the performance of its MSCI AC World benchmark and significantly outperformed its sector average with a positive return of 6.62 per cent.
Performance of fund vs sector and benchmark under Gait and Edgerton
Source: FE Analytics
As the fund’s name suggests, the duo looks for companies that manage sustainability risks with a positive impact and include ESG (environmental, social and corporate governance) in their investment research.
Stewart Investors Worldwide Sustainability has a clean OCF of 1.13 per cent.
Table of global funds with largest European weighting
Source: FE Analytics
