The reflationary environment and uncertainty over the French presidential election contributed to a ‘perfect storm’ for value-biased European stockpickers during the first quarter of 2017, according to FE Alpha Manager Paul Wild.
Wild, manager of the £1.8bn, four crown-rated JOHCM Continental European fund, saw the strategy underperform the IA Europe ex UK sector and MSCI Europe ex UK index during the first three months of the year.
It returned just 3.9 per cent over this time, compared with a gain of 6.2 per cent from its sector average and 7.14 per cent from its benchmark.
Performance of fund vs sector & benchmark over Q1
Source: FE Trustnet
He said: “It was a pretty disappointing start to the year. As we know, markets were strong, particularly in March, and over the course of the quarter we underperformed [the MSCI Europe ex UK NR index] by 2.6 per cent.
“It was predominantly stockpicking that drove Q1 performance. Stockpicking was unusually poor in February and March, which effectively explains 80 per cent of the drawdown. Generally stockpicking tends to be pretty good.”
The fund aims to generate long-term capital growth through active management of a portfolio of European (excluding UK) equities, focused in the large and mid-cap space. Wild’s investment process combines top-down economic and sector views with bottom-up stock picking.
Positions in the consumer discretionary sector were one of the main detractors from performance during the first quarter, losing 1.05 per cent.
Half of the loss in the sector was attributed to a holding in jewellery company Pandora, which suffered from “slightly weaker full-year numbers”, said the manager.
Wild adds that while the fund had reduced the position at elevated valuations, it retained about 1 per cent of its assets in the firm. Detractors in the sector also came from car manufacturer VW and Amer Sports.
A 0.55 per cent loss in the consumer staples sector, through holdings in Ahold, MHG and Metro, also detracted from performance.
The financials sector also lost 0.5 per cent, with French stocks BNP Paribas and Axa weighing on performance. Wild says he reduced exposure to the region during February ahead of the French election.
Other detractors from performance included positions in materials and industrials, as well as an overweight position in energy stocks.
He added: “No excuses, it was a poor quarter. The market background was complicated with the French elections and the reflationary rollover.
“But at the end of the day it was poor stockpicking and having larger than average positions in a number of stocks that underperformed.”
Noting the French presidential election result in which centrist Emmanuel Macro defeated right-wing populist Marine Le Pen, Wild says markets will have welcomed the result.
“Thankfully the French elections are now behind us and there has been a pronounced bounce in markets after the first-round results, less so after the second round given the weight of expectations,” explained Wild.
“Unequivocally, Macron represents a vote for Europe, which is in many ways more important than individual policies in the market context.”
However, Wild says it will become clearer what impact Macron will have once parliamentary elections are held next month.
The manager adds that the result means Europe is “more or less in a low risk environment from a political context” until Italian elections, likely to be held during the first quarter of 2018.
Looking ahead, Wild says the macro outlook “is as good as it’s been for a long time”, spurred by strong economic growth forecasts.
“In many ways Europe is in a ‘sweet spot’: the banks have been cleaned up, monetary policy will stay highly accommodative even with tapering, loan growth has moderately picked up and consumer sentiment is high, unemployment is falling, and profit growth – importantly – is at last accelerating,” he said.
“So far, the Q1 earnings season is going extremely well with 66 per cent of companies beating earnings [forecasts].”
He added: “In short, I think there is not much not to like other than the level of valuation that has increased to 15 times forward [earnings], but this should at least be seen in the context of Europe entering a period of profit growth acceleration.
“The euro is likely to keep strengthening but this is unlikely to provide a significant headwind.”
Heading into the latter part of the year, Wild says that the portfolio has been positioned in line with rising inflation expectations.
He said: “We have a beta overweight stance to banks & insurance, underweight staples, overweight certain domestic demand areas – not least construction & building materials – and overweight media.”
Noting low earnings growth from European companies in recent years, Wild says he has begun to position the portfolio in areas set to benefit from the trend of increased earnings.
Over three years, the fund has returned 37.62 per cent compared with a 36.5 per cent gain for the average IA peer and a 33.1 per cent rise in the benchmark.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The fund had an ongoing charges figure (OCF) of 0.81 per cent in the year through 31 December 2016. It has a performance fee of 15 per cent payable on the excess if the net asset value outperforms the benchmark on an annual basis. Any underperformance is carried forward. Last year the performance fee amounted to 0.03 per cent, according to the fund’s key investor information document (KIID).