A return to the value style and the rising expense of quality growth stocks led to a number of previously successful managers underperforming in 2016 for the first time in several years. 
Quality growth managers have been on a tremendous run since the financial crisis, with investors looking to take risk out of their portfolios and move into perceived ‘safer’ stocks such as the tobacco and consumer staples.
However, with the value style beginning to come back into favour last year in part due to these high valuations, investors may be looking to reduce their exposure to some of the best funds of the past decade.
Continuing our series, this week FE Trustnet focuses on Jupiter European, run by Alexander Darwall (pictured). The five crown-rated fund had beaten the market every year since the financial crisis heading into the year but lagged the FTSE World Europe ex UK benchmark by 14.5 percentage points in 2016.
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
Over the past decade, the fund has returned 184.95 per cent compared to the benchmark’s 77.57 per cent. However, last year the fund only returned 5.19 per cent.
Gill Hutchison, head of investment research at The Adviser Centre, said: “Jupiter European is a great long-term holding for investors seeking growth in Europe, but its distinctive style and concentrated portfolio construction means that relative performance can be variable, as we have been seeing.”
She suggests a value manager to add balance but warns that there is a dearth of pure value style funds in the Europe ex UK sector, as value investing in Europe has not been rewarded over time.
Hutchison said: “Furthermore, let’s not forget that these days, achieving a value bias in a European portfolio probably means holding a large allocation to the financials sector, which is not necessarily an appealing prospect.
“Therefore, it is difficult to identify one fund that would provide an ideal offset to Jupiter European’s strong growth bias.
“We can’t proffer a one-fund answer to the question, which leads to the conclusion that if investors are uncomfortable with the growth skew, a more diversified blend of funds is probably the way to go.”
Below, she looks at two funds that investors may look to add alongside the £3.7bn Jupiter European fund but caveats that they are more ‘blended’ approaches than straight ‘value’ investments.
Her first suggestion is the £603m JPM Europe Dynamic ex UK – run by John Baker, Jonathan Ingram and Blake Crawford - which features on The Adviser Centre’s Recommended list.
“It is based upon the tenets of behavioural finance and the team assesses stocks for their value, quality and momentum attributes,” the analyst said.
The fund has been a top quartile performed over one, three, five and 10 years, returning 111.59 per cent over the last decade.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund has a high weighting to the under loved financial sector, with Allianz and ING Group among its top 10 holdings, though its largest weightings are healthcare stocks Roche and Novartis.
“The disciplines of the process mean that valuation measures are continuously reviewed. It tends to offer a somewhat differentiated performance profile when compared to peers in the sector, given its distinctive style,” Hutchison said.
The JPM Europe Dynamic ex UK has a clean ongoing charges figure of 0.94 per cent and yields 1.45 per cent.
Her other choice is the £2.1bn Henderson European Selected Opportunities, run by FE Alpha Manager John Bennett.
As Jupiter European has typically had a more mid-cap focused approach than many of its peers (14.6 per cent currently), she says the large-cap bias should offer some natural diversification.
“It has a large-cap bias and therefore helps to diversify from a market cap point of view,” Hutchison said.
“From an overall investment approach point of view, it also blends well with Jupiter European; it is benchmark-aware (notwithstanding the manager’s willingness to express high conviction at times), contrasting with Jupiter’s benchmark-agnostic approach.
“Furthermore, it incorporates a strong macro-economic element, as opposed to Jupiter’s bottom-up biased approach.”
The fund is another with a strong long-term track record, returning 115.35 per cent over the last 10 years placing it in the top quartile of the IA Europe ex UK sector.
It is more overweight financials (31.9 per cent) than the JP Morgan fund with BNP Paribas, ING Group and Nordea Bank among its top 10 holdings.
The fund has an OCF of 0.85 per cent and currently yields 1.6 per cent.
Amaya Assan, senior investment research analyst at Square Mile, says the past 12 months has been difficult for the Jupiter fund but blips in performance are to be expected.
“Investors should have a long term horizon when they go into any kind of investment because markets can be so volatile and funds are sensitive to market events,” she said.
“Jupiter European has had a tough time not for the first time but it is certainly the most painful in the career of the manager.
“He [Alexander Darwall] has a very strong vision for what he is investing in. The portfolio is very concentrated and is very different to a fund looking for more benchmark-like returns.”
However, for investors looking to add diversification to their portfolios, she says the Artemis European Opportunities - run by Laurent Millet and Mark Page - could be an option.
Performance of fund vs benchmark and sector since launch
Source: FE Analytics
Since its launch in 2011 the fund has returned 94.17 per cent, 18.02 and 22.83 percentage points ahead of the IA Europe ex UK sector and FTSE World Europe ex UK benchmark respectively.
She says the Artemis fund is trying to provide a “more consistent return” so it is not generating aggressive outperformance like the Jupiter European fund has.
“It is just trying to deliver that consistent performance over time without being married to a specific investment approach or style,” the analyst said.
In its latest research note, Square Mile Research said: “Though the managers would perhaps ideally like to always purchase high quality growth businesses, they appreciate that there will be times when these look overvalued.
“As such, they will explore lower quality investment ideas but these need to be offering very attractive returns and at compelling valuation levels.
“Though they will tend to lag certain peers when a particular investment style is in favour, they will also be likely to avoid the inevitable hangover when the trend reverses.”