It is an interesting time to be a European fund manager. But within the European markets, investment...
It is an interesting time to be a European fund manager. But within the European markets, investment portfolio strategy is arguably more difficult than it has been for some time, particularly as it is now clouded by concerns over the influence of the US economy and stock market.
Fund managers as a breed are often accused of herd-like behaviour. This has been very apparent over the period since the introduction of the euro. But being near the front of the herd is not necessarily a bad place to be and the fund managers who went with the flow generally did well in the 18 months from the introduction of the euro in January 1999.
The history of the past two years of the European stock markets is inextricably tied up with the introduction of the single currency across the Euro zone. The euro effectively made all member countries view their own stock markets as just a small part of a larger Euro-zone market. Suddenly, in January 1999 fund managers were faced with the replacement of a domestic index as their primary portfolio benchmark by a pan European index.
Probably the most widely followed of these is the highly concentrated STOXX 50 index which consists of the 50 largest euro-zone companies by market capitalisation. Inevitably, the market action of the past two years has tended to focus on the shares in these companies. So the larger companies that were seen as likely to succeed in the wider euro world were consistently bought by new pan-European investors. Of course, the remarkable strength in the US technology sector helped improve the case for many of Europe's new global winners.
But as funds have been channelled into the larger companies across Europe, swathes of the national markets have been left behind. In those countries which already had an established equity savings culture, the net savings flow was outwards into other European countries.
Contrary to some opinions, there are still areas of very good value in the European markets waiting for the right catalysts to produce excellent investment performance.
In the past few months, the majority of active European fund managers have found it difficult to match the broad market indices as US technology shares have collapsed and dragged down the European market leaders of the previous two years. Smaller European companies have yet to make convincing headway against larger shares, but there is no doubt that the tide has turned and European fund managers must again learn a new set of skills if they are to keep up.
After a disappointing year for equity markets around the world, 2001 will almost certainly bring a new tone to the European markets. Europe's economic growth momentum may have stuttered recently but is still strong while the US is markedly slowing.
Jeremy Podger is a fund manager at Investec Asset Management
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