The sector has returned 10.32 per cent since the beginning of September and 34.73 per cent since the beginning of the year. It was one of the worst performing sectors in 2008, returning -32.67 per cent.
Performance of IMA European Smaller Companies sector vs DJ Euro Stoxx 50 over 1-yr
Source: Financial Express Analytics
The market rally that began in March has had a particularly positive impact on the sector and the positive economic figures coming out of France and Germany in August helped to boost further funds within this sector.
As
Nick Williams, fund manager of
Baring’s Europe Select fund, explains the reasons for the rally: "Last year's equity market collapse left European small cap stocks significantly undervalued relative to large caps, relative to bonds and relative to the yield available on cash. Since then, interest rate cuts and quantitative easing from the European Central Bank, the Bank of England and the US Federal Reserve, along with stimulus programmes in the US, China and Europe, have triggered a substantial rally in European equity markets. Small cap stocks have led the recovery, as investors have recognised their extreme undervaluation."
As investor sentiment plummeted in 2008 both the good and the bad were sold off in favour of less risky assets. The result is that there are now some very undervalued, but quality smaller companies which fund managers are now targeting. Good stock picking is the key to the future performance of funds within the
European Smaller Companies sector.
Simon Savill, fund manager of
Henderson’s European Smaller Companies fund, highlights the importance of good stock picking: "Markets have bounced strongly, albeit from extremely depressed levels, and valuations for some companies remain at low levels. However, the economic environment remains difficult. The approach of the fund continues to be one of stock picking, looking to invest in companies that have good long-term prospects and are attractively valued. There are still some attractive opportunities in what is expected to continue to be a volatile market environment."
Information Ratio is a measure of a fund manager’s stock picking ability. So called because it assesses the degree to which a manager uses skill and knowledge to enhance returns, this is a versatile and useful risk-adjusted measure of actively-managed fund performance. The higher the
Information Ratio the better. It is generally considered that a figure of 0.5 reflects a good performance, 0.75 very good, and 1.00 outstanding.
Using this measure
Nick Williams of
Baring Europe Select is the best stock picker within the
IMA European Smaller Companies sector. He has an information ratio of 1.3, almost double the next best in the sector.
Williams uses company analysis to identify the potential for earnings surprise relative to consensus estimates. He is looking for companies where improvement is not yet recognised by the market. Williams believes that the economic conditions of the next 12 months will necessitate a strong bottom-up approach.
"Our primary focus remains on companies with steady growth prospects. Within the more cyclical sectors, our exposure is concentrated on better quality companies with management teams which have historically proven to be adept at dealing with the vicissitudes of the economic cycle", Williams explains.
The data shows that funds within the
IMA European Smaller Companies sector have come a long way this year and industry experts are predicting that, with good stock picking this sector can continue to outperform its large cap brother.
In addition to
Nick Williams, fund managers with proven stock picking ability are
Richard Wiseman of
Insight’s European Small Cap fund and
David Dudding and
Philip Dicken of
Threadneedle’s European Smaller Companies fund. Wiseman’s information ratio is 0.73 and Dudding and Dickens’ is 0.6.
Performance of funds vs IMA Europe Ex-UK over 3-yrs
Source: Financial Express Analytics