By Simon Falush A strong 1999 boosted the overall three year returns in the European ex UK sector...
By Simon Falush
A strong 1999 boosted the overall three year returns in the European ex UK sector, with the average fund returning 41% to the end of February 2001.
Colonial First State European Smaller Companies fund came top of the sector with a 98.85% rise over the three year period. It underperformed for the year ending February 1999 but has outperformed the rest of the market since then. The biggest margin above average was during the investment period of 1999 to 2000 where it achieved 92.38% growth compared to a sector average of 40.15%.
Fund manager Jimmy Burns attributes the exceptional growth to the fact that smaller companies were undervalued over this time period.
Burns said that the fund, which holds companies worth less than £1bn, is a specialist and complementary product and therefore it could be susceptible to a continuing poor investment climate.
He said: "There is a danger that smaller companies will not be the first to recover as investors move towards large caps."
Relatively good performance by Colonial First State European Smaller Companies continued for the calendar year to February 2001, falling 8.28% compared with the average dip of 11.75%.
Despite the fund's higher than average beta, the outperformance has not come at the cost of a substantial increase in volatility.
Over the three year period the fund has a beta of 1.03 compared with the average score of 1, while the most volatile fund in the sector over that time period achieved a beta of 1.43. At the same time the fund has scored one of the highest alphas in the sector at 14.71 compared with the average score of 0.44.
Fidelity European also outperformed the market significantly, achieving 73.95% growth over the three years to the end of February compared with the group average of 41.26%.
Julia Edwards, senior fund analyst at Fidelity, put this down to maintaining a consistent stock selection style. Fund manager Anthony Bolton has been running the fund using the same philosophy since its inception in 1985. Edwards said: "The fund uses a contrarian approach and this has allowed it to avoid overvalued stocks."
For example, she said, a move away from technology, media and telecom stocks at the end of 1999 worked to keep the fund ahead of the pack.
"Bolton saw a valuation anomaly at the end of 1999 as the tech market became overcrowded and moved away from being overweight in the sector to being underweight. It was very good timing."
She stressed that stock selection is made with reference to particular stocks and not looking at sectors, but argued that in-depth analysis of companies allowed the fund to stay underweight in sectors such as IT hardware and software.
Over the three year period Bolton has also favoured small to medium sized firms, which added to the fund's outperformance. Edwards said: "Valuation anomalies are easier to pick in smaller companies so the fund was moved away from oil and telecoms." The fund is currently underweight in telecoms, oil and electrical sectors and overweight in media, tobacco and transport.
While the three year cumulative figure places Fidelity European as one of the top funds, it did suffer a period of underperformance for the year ending February 1999, showing an increase of 12.42% against a market average of 16.02%. It showed a slight edge over the rest of the market up to February 2000 at 49.72% over the average of 40.15%. The fund showed more significant outperformance last year with an increase of 3.35% against an average return of -11.75%.
This variability in performance did not affect the volatility in the fund, which posted a below average beta of 0.98 compared with the sector average of 1. At the same time it scored a high alpha of 9.09 compared with the average of 0.44.
Govett European Strategy also outpaced the rest of the field with excellent performance in 1998 and 1999. This strong performance was driven by a growth strategy but this also contributed to the poor performance in the most recent year. Growth in the fund for March 1998 through February 1999 was 34.55% against an average of 16.02%, while the fund achieved growth of 84.98% in year ending February 2000, on the back of its exposure to technology and telecoms.
Fund manager Peter Kysel attributes the strong overall performance to a growth oriented strategy but said this focus also left the fund vulnerable to the market slowdown over the past few months.
The profile of the fund has changed quite significantly over the three year period, with a shift away from telecoms. This has resulted in the fund having a high beta of 1.25. Kysel said: "Telecoms had good growth potential until they went on an outrageous buying spree on third generation licences." Where the fund was once overweight in telecoms, it now has no exposure.
Kysel has also shifted to more defensive stocks to reflect the current state of the market. The fund is now overweight in financials as Kysel sees them having good growth potential over the next few months.
He said: "The excessively high levels of interest rates are coming down and that should continue. The European Central Bank is set to reduce short term interest rates and financial institutions should benefit from this." He said he also sees pharmaceuticals as being a safe bet in the current environment.
Energy is another area that the fund is moving into, and the portfolio is now slightly overweight because of a perception that oil prices should remain fairly stable at their current level.
Norwich European Equity performed consistently well over the three year period, beating the average of European funds for each of the past three years. The fund has shown consistent strength relative to other funds in the sector and displayed low volatility with a beta of 0.96. Fund manager, Jeff Currington also puts the strong performance down to individual stock selection to.
An example of this active stock selection was the fund's holding in Vivendi Environment, a mid cap French company that Currington regarded as undervalued by the market. "We pick specific stocks that do well in a variety of conditions."
The fund has shifted to a mid cap bias, particularly in the past year, as there has been difficulty in finding attractive large cap stocks, with the exception of select oil stocks.
"We adopt a pragmatic approach, we are not normally overweight in oil but we moved into it at the right time to benefit from the recovery in oil price."
The fund is staying out of classic growth stocks, many of which have performed poorly over recent times. Moving out of technology stocks at the right time also helped maintain above average performance, Currington said.
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