Europe has lagged most other major markets over the past five years following concerns over the stability of the EU, the single currency and the sovereign debt crisis.
Having previously considered the IA UK Smaller Companies, IA Japanese Smaller Companies and IA North American Smaller Companies sectors, below we explore the IA European Smaller Companies sector.
The fortunes of the European small-cap sector appear to have turned around recently, as it has emerged as the best performer of the regional smaller companies strategies sector so far this year, as the below chart shows.
Performance of sectors YTD
Source: FE Analytics
Andrew Paisley, manager of the Standard Life Investments European Smaller Companies and Standard Life Investments Europe ex UK Smaller Companies funds, said there are two reasons why investors should consider buying into European smaller companies.
“From a timing perspective we think there is a cyclical reason and a structural reason,” he said. “The cyclical point is that we’re quite clearly seeing the economic recovery becoming more established.
“We saw this during Q1, which was actually the best reporting period for European companies for the last seven to eight years."
As well as this, he points to the Purchasing Managers Index (PMI), an indicator of growth going forward, which currently shows “fairly consistent” growth across the whole of Europe.
“Europe is a much better place now the economic recovery is gaining traction and small caps generally do quite well in that economic backdrop,” the manager said.
Finally, he noted that the main thing that had been holding people back from investing in Europe this year was the political backdrop and in particular that French presidential election.
“Following the election of [French president] Macron, which was a market friendly result, we’re seeing quite a significant amount of interest in Europe generally but smaller companies specifically,” he said.
The structural rationale is that investors are looking to hold more satellite holdings in conjunction with their core holdings.
“We are definitely seeing this trend towards using low-cost ETFs for a core allocation – for example to US large caps – but then augmenting that with a number of high alpha satellites and small-caps definitely fall into that category.”
However, he said holding smaller companies are better suited to investors with a long-term time frame. With that in mind, below FE Trustnet has examined the top performing funds over the past five years.
Paisley’s Standard Life Investments Europe ex UK Smaller Companies fund has been the top performing fund in the sector over five years, returning 194.92 per cent.
The manager took over the fund from Ian Ormiston (who moved to Old Mutual Global Investors in 2014) and has beaten both the sector and benchmark since assuming management.
The £53.4m fund is a concentrated portfolio of 44 stocks with a high weighting to industrials (30 per cent).
“You have roughly 1,000 [stocks] that I can pick from and all we’re looking to find is the 40 to 50 of these companies,” Paisley said.
“These are companies that are all well-regulated, have high standards of accounting and auditing so you get all the benefits of this better regulation and disclosure but with a global economic exposure.
“Just because they are listed in the European market doesn’t mean to say they are all domestically-focused and in fact the biggest constituent of the benchmark is the industrials segment and that is very much an export-facing sector.
“That’s at the fundamental level why we think European smaller companies are interesting per se.”
The fund has a clean ongoing charges figure (OCF) of 0.95 per cent and a yield of 1.05 per cent.
Top five funds in the IA European Smaller Companies sector over 5yrs
Source: FE Analytics
Meanwhile, his Standard Life Investments European Smaller Companies has been the fifth best performer – also placing it in the top quartile, as the above table shows.
The €493m fund can invest in UK small-caps as well as European smaller companies and in an upcoming article we will look at three UK small-caps Paisley is backing currently.
It has returned 180.11 per cent over five years and has an OCF of 1.01 per cent.
The second-best performer in the sector was the £125m Henderson European Smaller Companies fund managed by Ollie Beckett who was named manager in 2015, although he had been part of the Henderson pan-European equity team previously. It has returned 191.4 per cent over five years.
The fund does not invest in UK companies and its portfolio is made up of 92 holdings. It has a high weighting to German and Italian stocks (14.6 and 12.9 per cent respectively.
On a sector view, the fund has 32.1 per cent invested in industrials, 16.3 per cent in consumer services and 11 per cent in financials. The fund has an OCF of 0.86 per cent and a yield of 1 per cent.
Performance of funds vs sector over 5yrs
Source: FE Analytics
The £203.7m JPM Europe Smaller Companies fund managed by Francesco Conte, Jim Campbell and Edward Greaves, is the next on the list.
It aims to hold investments for around five years and over this period the fund has returned 191.18 per cent, as the above chart shows.
The fund is overweight French and Italian stocks with an underweight to Germany and Sweden; it has a particular focus on industrials (36.8 per cent) and consumer good companies (32.3 per cent). It has an OCF of 0.93 per cent and a yield of 0.66 per cent.
Schroder European Smaller Companies overseen by Luke Biermann is the final fund on the FE Trustnet top performers list.
Its portfolio, which must hold at least 80 per cent in European smaller companies in the bottom 30 per cent by size of the market, is made up of 72 holdings.
However, the £169.6m fund tends to look further up this market capitalisation range, with 30.3 per cent in companies of more than €3bn and 36.5 per cent in companies with a market cap between €1bn and €3bn.
Much like the other funds, its main sector overweight is in industrials, though it also has a higher weighting in technology and consumer discretionary stocks.
The fund has a yield of 0.75 per cent and an OCF of 0.95 per cent.