The investment platform Hargreaves Lansdown (HL) removed the £598m TM CRUX European Special Situations fund from its wealth shortlist, having recently added the £1.5bn BlackRock Continental European Income.
The decision to remove the CRUX fund was due to the “lacklustre” performance of more recent years.
European equities have struggled since the beginning of the year, with the IA Europe Excluding UK sector down 20% in March 2022 and now at -15.7% for the year, but HL analysts attributed CRUX’s underperformance to weak stock selection.
Investment analyst Josef Licsauer said: “In our view, the managers’ stock picking has been weaker than we expect and detracted from performance over this six-year period”. This is illustrated in the graph below.
Performance of funds vs benchmark and index over 6yrs
Source: FE Analytics
Lead manager Richard Pease has favoured medium-sized companies and companies in the industrial sector – which have been key detractors in recent years.
“We also feel the team has at times deviated from their tried-and-tested investment process. The managers can invest up to 20% of the fund in non-European companies. While this flexibility has the potential to enhance returns, some of these investments haven’t been aligned with the process and detracted from performance,” said Licsauer.
Taking its place on the shortlist was the BlackRock Continental European Income fund, which was chosen for its long-term performance potential on 26 August 2022.
The analysts highlighted it as a good fit for an investment portfolio focused on income or to provide diversification to European or other global funds focused on growth.
Despite difficulties in the European market, BlackRock Continental European Income managed to stay on top of the sector by five percentage points over one year.
A more defensive investment approach (the fund is unlikely to hold cyclical stocks) and strong stock selection helped limit volatility compared to peers in times of uncertainty, according to HL, making it a good option as counter-balance in a more adventurous income-focused portfolio.
Brian Hall, who became co-manager in March 2021 flanking Andreas Zoellinger “has impressed,” according to Licsauer.
“Hall brings a strong background and track record of investing in European value, which complements Zoellinger’s skillset. Both managers can call upon the support of the wider European team at BlackRock, which is well resourced and experienced.”
The managers like higher quality companies that are attractively valued and have a competitive advantage or brand that others struggle to replicate, strong balance sheets, and high-quality management teams.
Around 60% of the fund is held in companies that yield more than the market, while the remainder is allocated to business with potential for dividend growth.
The fund’s focus on income means it offers an attractive yield for clients – currently at 4.2%.
Interactive investor analysts agreed, including it in their own best-buy list earlier in the year. The firm also kept the CRUX fund after a review, highlighting the potential for future returns after a weak period, a discrepancy with those at Hargreaves, who have seen fit to put it on the chopping block.