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Threadneedle European Select vs Henderson European Selected Opportunities: Which European fund is best for you?

04 April 2017

In our latest ‘fund battle’, we look at the fourth- and eighth-largest funds in the IA Europe ex UK sector, Threadneedle European Select and Henderson European Selected Opportunities.

By Lauren Mason,

Senior reporter, FE Trustnet

Developed market equities have been the underdogs during the first quarter, with the MSCI Emerging Markets and MSCI AC Asia Pacific ex Japan indices surging ahead with respective returns of 10.13 and 11.48 per cent.

Performance of indices in 2017

 

Source: FE Analytics

This could be due to varying levels of geopolitical uncertainty across these markets, given the upcoming French and German elections, the recent triggering of Article 50 by the UK and uncertainty over whether US president Donald Trump’s can push through promised pro-growth policies.

That said, all major indices are up year-to-date in sterling terms and, over the last year, have returned at least 20 per cent (arguably bolstered by the plummet in the pound).

Trailing behind, but just ahead of the FTSE 100, is the MSCI Europe ex UK index which, over the past 12 months, has returned 27.22 per cent.

While many industry commentators have been vocal about ‘toppy’ valuations across risk assets, Schroder’s head of multi-manager at Schroders Marcus Brookes believes Europe is one of the last macro stories left to play out.

“Obviously we have Brexit and there are going to be all sorts of worries about that,” the manager said. “I think that’s one of the many reasons why Europe is struggling; the international investment community has not been willing to put their money in Europe, there’s always been a reason to go elsewhere,” he explained in an FE Trustnet article last month.

“In most people’s cases, it’s been in the US equity market which looks incredibly rich in terms of valuation.”

As such, we decided to take a look at two of the more behemoth offerings in the IA Europe ex UK sector. The four crown-rated Threadneedle European Select fund is £2.9bn in size and has been headed up by FE Alpha Manager David Dudding and Mark Nichols since 2008 and 2016 respectively. 

The fund is not restricted by a benchmark and is able to invest anywhere within the European market. It aims to invest in a diverse range of countries and sectors through a relatively concentrated portfolio, which currently stands at 42 stocks. It has a clean ongoing charges figure (OCF) of 0.83 per cent.

We pitted this fund against John Bennett’s £2.1bn Henderson European Selected Opportunities fund, which has a clean OCF of 0.85 per cent, four FE crowns and a relatively unconstrained approach. It also has a concentrated portfolio of 60 stocks.


Both funds have comfortably outperformed their average peer over three, five and 10 years. Over the last decade, however, the Henderson European Selected Opportunities fund has returned 118.56 per cent while Threadneedle European Select has returned 131.03 per cent.

Performance of funds vs sector over 10yrs

 

Source: FE Analytics

In terms of drawdown over this time frame, however, the Henderson fund has the slight upper-hand with its top-quartile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) of 34.39 per cent while the Threadneedle fund’s 36.05 per cent drawdown places it in the second quartile.

While the former has a downside risk ratio (which measures susceptibility to lose money during falling markets) of 19.62 per cent, however, the latter’s risk ratio is lower at 16.97 per cent.

Given the similarities between both funds at face value, which vehicle would be the better option for investors looking to utilise - as Brookes puts it - one of the last macro stories left to play out?

Martin Bamford, managing director at Informed Choice, said: “There is very little to separate these two funds. They have very similar performance, management tenure, charges and size.

“The quant screen we use for our fund research gives both funds an identical score of 73 per cent, considering factors including consistency of performance, risk-adjusted returns and cost.  

“Given a choice between the two, I would favour Threadneedle, with its more concentrated portfolio of 42 stocks against the 60 currently held by Henderson. Threadneedle also has a lower portfolio turnover rate than Henderson, suggesting a higher level of manager conviction.”

That said, he believes either fund would be a sensible choice for an investor that wants discrete exposure to European equities rather than the broad allocation that would be offered through a tracker.

“With a great deal of political and economic uncertainty abound in the eurozone over the coming years, an active approach to fund management here should pay dividends,” he added.

Rob Morgan, pension and investment analyst at Charles Stanley Direct, says there are indeed differences between the managers’ stock selection process, which has led to the lower portfolio turnover in Threadneedle European Select.


“David Dudding, manager of Threadneedle European Select places considerable emphasis on finding quality companies with competitive advantages, enabling them to achieve strong and sustainable long term returns,” he explained. “As such, changes in the portfolio are quite rare and he tends to stick to holdings, once identified, for the long term unless the rationale for investing is undermined in which case they are sold completely.

“John Bennett, meanwhile, takes a pragmatic approach investing in any areas he sees value. The manager strongly believes in mean reversion in stock prices, profitability, valuations, GDP and sentiment. Everything is cyclical.

“This contrarian style leads to quite large sector biases at times, and a holding period that can be much shorter as he rotates between successful holdings that have become more expensive and newer, cheaper ideas. He tends not to sell out in one transaction, scaling out as the price increases.”

While Morgan says both fund managers have successfully applied their approach for a number of years, he prefers Bennett’s more value-orientated approach, given that many parts of Europe are currently enjoying an economic recovery.

“Previously-depressed areas could well return to the fore. The more quality-growth bias of Threadneedle makes it a decent long term holding but that style may in fact be a headwind in the shorter term,” he said.

Ryan Hughes, head of fund selection at AJ Bell, agrees that Threadneedle adopts a persistent quality growth style while Henderson adopts a more pragmatic and rotational approach.

“Henderson are comfortable investing on a contrarian basis while Threadneedle have a focus on quality which typically will rule out certain sectors such as telecoms and utilities,” he explained.

“Personally, my preference in this market would be for Henderson given the more pragmatic nature of their approach as if sentiment remains strong I would expect Threadneedle to underperform as quality stocks take a back seat.

“Over the long term, it is easy to make an argument for holding both funds given their different approaches.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.