Odey continental european delivers 30.22% over past three years against the sector average of -28.36% by disregarding stock market indices
Only two funds in the continental European sector delivered positive returns over the three years to September 2002. The remaining 87 posted losses in a sector that tumbled by an average of 28.36% over the past 36 months.
The best performing and least volatile fund in the sector was Odey Continental European, managed by Hugh Hendry. The Odey fund delivered positive three year returns of 30.22%, compared to the sector average loss of 28.36%.
It was only the £150m Odey Continental European and Fidelity European funds which made positive returns over this period.
Fidelity European, managed by Anthony Bolton, was the second best performer, returning 15.21% over the 36 months. The £1.72bn Fidelity fund is now being handed over to Tim McCarron, to enable Bolton to concentrate on managing his UK Special Situations fund.
Within the Odey Continental European fund, the most notable period of discrete outperformance was achieved during the year to September 2002. Over those 12 months, the fund made a positive return of 18.96%, while the average fund in the sector lost 21.92%. Hendry did post a negative return in the 12 months to September 2001 of 12.6%, but this still significantly outperformed the average sector loss of 30.72%.
The outperformance in these two discrete years, Hendry said, results from paying little attention to stock market indices. Rather he focused on individual companies with strong prospects.
'My portfolio was a million miles removed from what the stock market was doing. It has had a very high tracking error, and we have been rewarded for taking on some of that specific risk,' he said.
Since May the fund has been invested at around 30-35% in government bonds, reflecting his fears of deflation. Among bonds, there is a particular emphasis on Swiss issues.
'Prior to May, I was fully invested and gained 22% in the first five months of the year. I am quite keen to squash the notion that we just do well when prices are falling. To do well you have to extract profit from the market. Even in a bear market, about 5% of all stocks we looked at were rising. We had ownership of those stocks and did well as a result.' Although much of that gain has subsequently been given back, Hendry said this demonstrates there is an ability to make money when the opportunity presents itself.
Within the equity portfolio, Hendry said he has been rewarded for taking on specific risk in the past two years. In particular, he has bought some smaller, non-index type names and sold them at the appropriate times.
The equity portfolio, with 60 holdings at present, is dominated by mid and small cap companies. While holdings in the portfolio have been as high as 100 in the past, Hendry has brought that down as the fund moved into Government bonds.
Top equity holdings include little known names such as Autostrade (3.91%), Givaudan (3.89%), Autopistas Concesionaria (3.35%), Swedish Match (2.72%), Greek Organisation of Football (2.69%), Cloetta Fazer (2.16%) and Electrabel (2.16%).
However, in the 12 months to September 2000, the Odey Continental European fund slightly underperformed its sector average by delivering returns of 25.25%, compared to the sector average gain of 33.19%.
According to Hendry, this underperformance resulted from him being too bearish, too soon at a time when the market was surging ahead. He also avoided a heavy emphasis in the technology sector, which outperformed at the time.
The annualised standard deviation of the fund was 16.4, compared to the sector average of 22.96. The annualised alpha was 16.09, while the beta was 0.65.
Another strong performer in the sector was the £719m Jupiter European fund, which lost 10.18% of its value over the past three years, so outperforming the sector average of 28.36%. The outperformance over three years followed consistent outperformance in each of the discrete three-year periods. The fund changed managers from Richard Pease to Alex Darwall in January 2000, so outperformance has been achieved during the tenure of both managers.
The Jupiter fund also had a lower-than-average level of volatility. The annualised standard deviation (ASD) of the fund is 2.58, compared to the sector average of 22.96. The annualised alpha is 5.96 and the beta is 0.89. Darwall said he pays little attention to market indices, but rather constructs the portfolio purely based on the merits of individual stocks.
'My stock selection is about identifying companies that I understand, and that have good visibility. It follows that I only invest in good quality companies, and overall that results in less volatility,' he said. He added, ironically, his refusal to be slave to the index has contributed to less volatility. He cites the example of holding nothing in the troubled Vivendi company, even though it was a large stock in the index, as an example of how this readiness to take a stance against the index has paid off.
'My top 10 stocks, I expect, would be very unlike the top 10 stocks of most of my peers.
These holdings include Air Liquide (5.46%), Elsevier (4.96%), DNB Holdings (4.87%), Neopost (4.69%), Medion (4.44%), Novo Nordisk (4.25%) Novozmes (4.20%) War Loan 3.5%, Perpetual (3.68%), Mediaset (3.58%) and Matalan (3.54%).
Within the fund there is an emphasis on mid cap stocks. Individuals holdings display characteristics of high barriers to entry, guaranteed business and quality management, Darwall said.
Darwall said he is currently very underweight in financials, while there is a positive emphasis on consumer non cyclical companies.
He said there is low volatility in the portfolio. The top 10 companies in the portfolio are largely similar to the top 10 at this time last year, he noted.
'There is no winning strategy in a deflationary environment, I am just trying to lose as little as possible. Things will pick up, but in the context of the status quo, I won't be able to make money in the equity market, it will change one day.'
Among the poorest performers in the sector was the Invesco Perpetual European Growth fund, which tumbled by 37.73% over the 36-month period. For the past 12 months the fund has been managed by Alister Hibbert, who took over from Rory Powe.
In the first of the discrete year periods the 12 months to September 2000, the fund was a sterling performer, returning 75.15% ' more than double the sector average of 33.19%.
This outperformance was due to the former manager Powe's overweight position in technology, media and telecom stocks.
But it was this emphasis on new economy companies that led to the demise of the fund's outperformance in the following year. In the 12 months to September 2001, the fund shed 49.6% of its value, while the sector lost a lesser 30.72%.
Hibbert, as the new manager, has not been able to since turn around performance of the supertanker £1.05bn fund. In the 12 months to September 2002, the Invesco Perpetual European Growth fund lost 29.46% of its value, while the sector lost 21.92%.
The fund's volatility was typically high. The ASD was 32.31, while the annualised alpha was 0.29% and the beta 1.26.
Also lingering around the bottom of the performance tables for the 36 month period were Old Mutual European Blue with three year returns of -50.61%, Old Mutual European at -43.7% and Baring European Growth, which fell by 45.96%.
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