Fund posts 47.28% returns over three years with annualised alpha of 13.94% and is the least volatile fund in the europe excluding UK sector
There are extremes between the good and bad performers in the Europe excluding UK sector, although the underperformers over three years outnumber those that have achieved good returns by some two thirds.
CF Odey European joins Fidelity European and Jupiter European Special Situations as those players in the sector with good positive returns and correspondingly high alphas over the three years to the end of April 2002. CF Odey European returned 47.28% over three years and achieved an annualised alpha of 13.94% against an average of 0.33%. This with an encouraging beta of 0.67%, the lowest in the sector, which scored an average of 1%.
Hugh Hendry, fund manager of CF Odey European, said: 'We have compounded 20% returns over five years but the most important thing is we are the least volatile fund in the universe. We have established superior returns without the risk profile of our competition. That is explained by the fact that it is a hedge fund in many respects. We obviously can't short but we practise emotional intelligence. My number one priority is that any stock must have relative performance. My argument is how can you hold any stock, which is not outperforming the market because that's what we are supposed to do. I don't buy a stock unless it has demonstrated it can outperform the market.'
Fidelity European returned 57.83% over the three years with an annualised alpha of 16.92%. Fund manager Anthony Bolton managed to achieve this not at the expense of extra volatility, maintaining a below average beta of 0.9%. The weighting within the fund is also crucial to minimising risk.
'The European fund has about £1.9bn in assets,' Adrian Tarver, senior analyst for Fidelity European, said. The portfolio is diversified to include 50% of stocks invested in large companies, which helps with liquidity. The portfolio construction diversification is where the low volatility comes from, Tarver said.
Top slot in the sector for performance, however, goes to Jupiter European Special Situations, which stormed ahead in the sector posting a return of 75.93% over three years and an annualised alpha of 22.02% although it marked up a higher than average beta at 1.07%.
The key to the top performers hinges on how they fared over one, two and three years in discrete terms. Jupiter's European Special Situations made the most of its 1999 performance returning 93.39% in the year to April 2000 against a sector average of 29.67% and despite seeing negative returns of -4.17% and -5.56% over two and one years respectively still came in the top three over the three year period.
CF Odey European posted more consistent positive returns, with 1.22% over the year to April 2001 and 20.07% in the year to April 2002. In the year to April 2000 the fund's return was 21.18%, significantly down on other players such as Cazenove European which returned 79.34% over that time period but only offered 0.1% over three years. Hendry describes his investment selection approach as ultra value management. 'But that stems from our assessment of risk,' he said; 'What does a hedge fund do compared with a unit trust manager? It is pure risk management. All of the risk you find in the equity market today can really be accounted for by market risk.'
Hendry believes that at a P/E of 20 times, the European markets still look overvalued, noting a level of 10 times on a yield of 5% is more realistic. 'That isn't the case today but it is my belief it will be in the future.
'The very last thing I want to do is own the market. If stocks find a bottom trading on 10 times earnings let's buy stocks at 10 times earnings today ' that takes you into smaller companies and you can actually buy them on eight or six times earnings with very high dividend yields. In doing that I've stumbled on a very strong bull market and I'm one of the only funds that is up over 12 months.'
Deutsche Europa showed a very impressive return of 114.84% in the year to April 2000. But plummeting returns of -23.58% and -23.22% over the next two years pulled it down on a three year return, which while still positive at 26.06% is well below what they could have expected. However, that impressive performance in the year May 1999 to April 2000 ensured an annualised alpha of 12.75% despite the falls in subsequent years.
The Europe excluding UK funds' performance largely reflects a turbulent and struggling market slowly beginning to show signs of a turn-around. Only now are signs being seen of optimism, following the US coming out of its second and third quarter recession and leading recovery globally.
'People generally in Europe are feeling more confident there will be more demand for their goods from the US,' said Frederic de Merode, investment director of Fidelity International.
'There seems to be an economic recovery in place led by the US which is slowly creeping into Europe. There is a lot of volatility in the market especially in the second quarter and there are a lot of concerns over earnings. The US recovery started as early as October last year and we are still waiting for earnings to come through. That's even more true for Europe which is lagging behind the US in that recovery cycle.'
Tarver said: 'It's been a very difficult market for Europe over the past two years ' the big event we're still feeling the repercussions of is the demise of technology, media and telecoms. This lack of direction has led to the wide disparity of valuations across most sectors and the prevalence of value investing.'
Tarver added the focus for the Fidelity fund is on specific sectors rather than stocks. These would be defensives like tobacco, construction and the media.
'We're looking for value securities, something in the company not in the share price,' he said. 'Areas which have been avoided have been the problems of telecoms and also banks and pharmaceuticals.'
Hendry added: 'Price is the only protection you've got in the current environment, buying stocks at the right price and being a very value conscious manager. We think moving forward you will see a presence of inflation which will be a break from the last 10-15 years which means long term bond yields are heading up so you don't want to be in growth companies.'
To give some idea of how impressive the top performers have been in Europe excluding UK sector, the lowest positive return is Cazenove European B's 0.1 %, achieved with a beta of 1.45% well above average.
After this funds are well off the mark. The worst performers in the sector are Baring European Growth with a three year return of -20.83%, Five Arrows Euro Opps Stl A with -17.8% and Old Mutual European Blue with -19.82%. Alpha scores were -7.19% for Barings and -6.7% for Old Mutual. Five Arrows posted an annualised alpha of -6.21% over the time period to the end of April 2002. Adrian Farthing, who took over management of Old Mutual European Blue in December 2000, said: 'We had a recovery through until June 2001 and I then moved to more positive stance in the market believing it to be cheap. We stuck to our guns and from the end of September through to April the fund has been above average.'
Regression analysis: Regression statistics can be used to compare the relationships between funds, markets or a specific benchmark index. They do not make the assumption that the variables (funds) are related as cause and effect, but permit them to be influenced by other variables (markets).
Alpha: The Alpha describes the theoretical reward obtained by one investment when the second investment has a zero return. To calculate the Alpha, the returns of each are taken and compared together to identify their relationship. This reveals relationships between investments in both bull and bear markets. When applied to portfolios, it can be considered to be the return over and above (or below) the market through portfolio strategy. Good managers have a positive Alpha.
Beta: The Beta is the amount the first fund moves when the other moves by one unit. Beta is a measure of relative volatility (absolute volatility is calculated by standard deviation).
If one fund always goes up and down by 1.5 times of the performance of the index, its Beta will be 1.5. This implies that if the return of the index is positive, then 1.5 times this positive return can be expected of the fund. If the index goes up (or down) 10%, the fund goes up (or down) 15%. Beta represents the volatility of the first investment versus the second. It is only an estimate and to be accurate there has to be a perfect correlation between the two investments.
Correlation: Correlation shows the strength of a linear relationship between two funds. A perfect correlation is when the investments behave in exactly the same manner. A perfect positive correlation is represented by 1, perfect negative correlation by -1 and no correlation with a 0. A perfect negative correlation suggests that for every 1% movement by the index we would expect to see -1% movement return on the fund and vice versa. This is an important factor when using modern portfolio theory.every 1% movement by the index we would expect to
Source: Standard & Poor's
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