From the Greek debt crisis to Brexit, the eurozone has suffered its fair share of geopolitical turmoil over the past three years, and the continent is not exactly out of the woods just yet.
There is more upheaval expected in 2017 with a number of national elections coming up, not least in France, where a victory for Marine Le Pen would continue the trend of rising national populism seen with Brexit and the election of Donald Trump in the US.
However, investors have been returning to European equities, encouraged by improving jobs data and economic conditions, plus lower valuations than the increasingly expensive US stock market.
A recent Bank of America Merrill Lynch global research fund manager survey put European stocks at a 47% discount versus the US market, which has been tipped for a correction as the Trump bump begins to stutter.
The report said the instability created by the French national election would give way to a relief rally that could mean stocks rise further.
‘The better economic and inflation outlook, mixed with an expected drop in policy uncertainty after the French election, should make the region strongly appealing,’ it said.
Over the past three months, the MSCI Europe index is up 8.8%, marginally ahead of the S&P 500, which is up 8%, but looking back further, Europe has been a torrid place to be.
The average manager in the Citywire Equity - European Region sector is down 7.7% over the past three years, marginally worse than the MSCI Europe, which was down 7.6%.
Of the top 10 managers in this category only three, across two funds, have posted positive returns over this time frame, although the entire 10 did manage to beat the market.
The top performers, Citywire + rated portfolio managers Borge Endresen and Jason T Holzer, run the $532.1 million Invesco European Small Company fund.
The managers have a bottom-up approach based on company fundamentals rather than geographic location or sector-based decisions.
The duo took advantage of the volatility of 2016 to add positions at attractive valuations.
‘As disconcerting as volatility may be, we believe it creates long-term opportunities for our shareholders,’ they said in their annual report for 2016. ‘It’s rare to find a thriving business at a compelling valuation when everything is going right; rather, those valuations typically occur when fear dominates the market.’
Although the fund’s small company mandate means that by its nature it will look different to the broader benchmark – it has a 49.6% overweight to small caps and 32.6% to micro caps compared with the MSCI Europe index – it is worth noting that it has beaten the more specific MSCI Europe Small Cap index over one, three and five years too.
It also has an off-benchmark allocation of around 5% to Africa and the Middle East.
Industrials dominate the fund’s sector breakdown, accounting for 29.3%, with information technology 22.4%, financials 13.7% and consumer discretionary 10.9%.
Top European Equity managers by three-year total returns
|Rank||Manager||Fund(s) managed||Total Return (%)||Manager Ratio*|
|1 year||3 years||5 years|
Jason T Holzer
|Invesco European Small Company||19.5||7.9||70||0.6|
|3/25||Carl Dirk Enderlein||Brown Advisory-WMC Strategic|
|4/25||Daniel Kranson||Virtus Greater European Opportunities||3.75||-0.91||-||0.36|
|Franklin Mutual European||15.3||-1.9||38.5||0.3|
|Columbia Acorn European||10.5||-4.4||44.3||-0.1|
|9/25||Stefan Lindblad||Fidelity Europe|
|10/25||Robert Nightingale||Ivy European Opportunities||10.9||-7||-||0|
*The manager ratio is the average information ratio of the funds the manager has run in this sector over the past three years. A positive figure means the manager has outperformed their benchmark(s).
Carl Dirk Enderlein, the only Citywire AAA-rated manager in the category, runs the Brown Advisory-WMC Strategic European Equity fund. He has worked at Wellington Management, which subadvises the fund, since 2010.
It’s a much broader fund than the Invesco portfolio, but also has as its biggest sector allocation industrials, accounting for 29.7% of the fund compared with a benchmark weighting of 12.8%.
The $1.1 billion fund invests mainly in large caps in developed Europe, with a 29.3% exposure to the UK, 18.8% to Switzerland, 13.4% to France and 9.8% to Sweden.
The fund has positive three-year numbers but slipped below the benchmark in 2016, after a poor second half of the year, in which it returned just 0.4% versus the index’s 4.9%.
Although the strategy’s heavy UK exposure might appear to be the cause of this underperformance, the drop owed more to events in the US as top 10 holding Heineken suffered due to its exposure to the peso, hit hard by Trump’s election victory.
Enderlein too sees further volatility in 2017 and plans to use this to add to high-quality names trading at a discount relative to the market.