Regional funds are likely to attract more investor attention over the coming year. Some investors remain keen on the US pointing out that its economy remains one of the strongest in the developed world, even though its stock market has already rallied significantly; at the other end of the spectrum, Europe and Japan are seen as being very cheap, given their various economic headwinds.
In the next article in the series on rolling returns, FE Trustnet examines the IMA Europe ex UK, Japan and North American sectors to find out which funds have stayed first quartile over successive rolling five-year periods back to 2004.
Our study focuses on the six rolling five-year periods between 30 November 2004 and 30 November 2014 to determine which funds are first quartile in each period. Only funds with a 10-year track record were included in the study.
The threat of deflation and a third bout of recession have put investors off European equities but some asset allocators remain confident , such as FE Alpha Manager Rob Burnett who recently told FE Trustnet that “Europe is one of the cheapest places on planet earth right now”.
FE Analytics shows five funds from the European peer group are first-quartile over all six five-year periods covered by this study - BlackRock Continental European, BlackRock European Dynamic, FF&P European All Cap Equity, JOHCM Continental European and Jupiter European.
As the below graph shows (sorry it’s so busy), all five if these funds have comfortably beaten both the average European fund and the MSCI Europe ex UK index over the 10 years examined.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
Alister Hibbert’s BlackRock European Dynamic and Alexander Darwall’s Jupiter European are the two highest rated funds of the five, with both appearing on the FE Select 100 and holding an ‘AAA’ rating from Square Mile Investment Consulting & Research.
The FE Research team highlights BlackRock European Dynamic as being suitable for investors for aggressive capital growth and who want to benefit from a recovery in the European economy. It recommends an investment horizon of at least seven years.
The team added: “Hibbert’s style is more aggressive than other BlackRock portfolios focused on the continent, with greater sensitivity to the performance of European stock markets; this is a characteristic the fund has kept even when it has shifted to a slightly more defensive stance.”
Hibbert has only managed the fund since March 2008 but has performed strongly since then, returning 98.29 per cent against an average return of 29.17 per cent in the peer group and a 32.71 per cent gain in its FTSE World Europe ex UK benchmark. This makes it the second best performing fund in the sector over this time.
The five FE Crown-rated Jupiter European fund is rated highly by Square Mile because of Darwall’s aptitude for finding long-term growth opportunities in the region, which many other investors have failed to do with “sufficient rigour” to achieve success.
The consultancy said: “The manager in contrast has maintained his discipline and continued to focus on the limited number of companies that meet his selection criteria. As a result, the portfolio tends to be concentrated with between 30 and 40 stocks.”
“This may sound like a potentially combustible mix but the manager's diligent research leads him into positions which have limited cross correlations and the risk profile of the fund tends to remain at acceptable levels.”
Turning to the IMA Japan sector, none of the 36 funds with a long enough track record have put in top-quartile returns over all six periods covered, although two have come close by achieving this in five of them.
FE Alpha Manager Chris Taylor’s Neptune Japan Opportunities fund slipped into the second quartile in the period spanning November 2008 to November 2013 while GLG Japan CoreAlpha, led by FE Alpha Manager Stephen Harker, fell out of the first quartile over the most recent five-year period.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
As the graph above shows, Neptune Japan Opportunities made close to 215 per cent over the 10 years examined in our research, well above the gains made by the sector average and the Topix. A key part of this return was Taylor’s gutsy decision to effectively short the Japanese market and hedge back into sterling in 2008 – leading to an 84.26 per cent return when the index dropped 6.70 per cent and its average peer lost 3.64 per cent.
The fund is another member of the FE Research Select 100, where Taylor’s willingness to hedge out exchange rate exposure and build the portfolio around his macro view are highlighted.
Taylor recently told FE Trustnet that investors in Japan could see their money grow tenfold over the coming five to seven years if the Japanese government is successful in reforming the economy – so long as they hedge out exposure to the yen.
GLG Japan CoreAlpha made almost 100 percentage points less than the Neptune fund over the time looked at in our study, but still returned 117.67 per cent. This is close to double the gain of the Topix.
The fund is on the FE Research Select 100 and holds an ‘AAA’ rating from Square Mile. The fund is highly regarded for the managers’ focus on companies trading on cheap valuations.
Square Mile said: “Note that it can take time for the market to correct the valuation anomalies that the team identify. This coupled with the low turnover approach may mean that holders require patience.”
Only two funds in the IMA North American sector have stayed top-quartile but both have caveats attached to them.
Threadneedle American achieved this across the tenure of two managers - under Andrew Holliman between April 2004 and May 2011 then under Cormac Weldon, who left the firm to join Artemis at the start of 2014. Diane Sobin took over the portfolio and since then has made a third-quartile return of 10.68 per cent.
Schroder QEP US Core, managed by the asset management house’s quantitative equity products team, is the other fund staying first-quartile over rolling five-year periods. However it’s aimed at institutional investors, with a minimum investment of £100,000.
Two other funds in the sector have come close, with first-quartile returns in five of the six periods and second-quartile gains in the remaining. These are FE Alpha Manager Jenny Jones’ Schroder US Mid Cap and Tom Luddy, Susan Bao and Helge Skibeli’s JPM US Select funds.
In the next article of the rolling returns series, FE Trustnet will look at smaller companies funds to see how many have been able to deliver consistent outperformance.
