Four years after the launch of the Euro, Martyn Ingram of The Investors Partnership sizes up which funds best capitalised on the eurozone
The euro was introduced as a physical currency just over four years ago in January 2002. Since then a wide range of investors have looked to take advantage of the investment opportunities developing in the European region. Historically, mainstream European funds invested predominantly in the stocks of major companies based in EU countries, but the introduction of the eurozone changed the way international investors looked at the continent. Many well-managed companies in the eurozone, particularly those in countries with relatively small economies, were set to benefit from the introduction of the euro, as were companies in countries that were looking to benefit from future membership of the European Union.
UK investors who had exposure to European equity funds in 2001 typically lost 20%+ on their investments, and many lost the same, or more, the following year. At the beginning of 2002, six funds in the AUTIF (now IMA) Europe ex-UK peer group were dominant in terms of size: Fidelity European, Fidelity Institutional European ex-UK, Gartmore European Selected Opportunities, INVESCO Perpetual European Growth, Schroder Institutional European and Threadneedle European Select Growth. These six funds each had more than &1bn under management and collectively they represented about 35% of assets invested in the AUTIF sector.
As most retail investors are heavily influenced by past performance, it is not surprising to find that some of these funds were among the most consistent performers, in terms of peer group rankings, over the previous five discrete years. The most consistent performers were: Gartmore European Selected Opportunities, Henderson European Capital Growth, HSBC European Growth, Threadneedle European Select Growth, Norwich European Equity and Fidelity European.
Only seven of these large and top-performing funds were retail funds, and above I look at how all of these retail funds have fared, performance-wise, over the last four years. Note that in 2004 most of these funds did not perform well relative to some of the best performers in the sector - the exception being Fidelity European.
In 2002, most European funds were heavily weighted to the mature markets, and they were also heavily weighted to countries and stocks included in the major regional indexes such as the FTSE World Europe ex-UK Index. The result of this approach to asset allocation was that investors did not get a high level of access to mid-cap and small-cap stocks in the region or direct exposure to emerging Europe.
There were, however, some newer funds that were taking a different approach, such as Jupiter European Special Situations (which was then managed by Leon Howard-Spink, who is now at Schroders); there was also Odey European (now Odey Continental European), which has always focused on absolute returns, and produced a positive return in 2002 but underperformed in 2004. There were some other interesting funds that had no focus on large cap, such as Baillie Gifford European Smaller Companies, Baring Europe Select, INVESCO Perpetual European Smaller Companies, and Threadneedle European Smaller Companies.
A change of heart
For many years I've not been an enthusiast about many actively managed European funds, as most funds have added little value in terms of performance returns relative to their benchmarks. Over recent years there have been opportunities to take advantage of changes in the value of the euro without being exposed to stock-specific risks. Also, other regions of the world have offered good investment opportunities without the need to move strongly away from benchmark weightings.
However, without doubt there have been opportunities in European smaller-companies stocks, and there have been opportunities to gain international exposure from stocks listed in Europe. Therefore, for investors who need to invest geographically and require a European equity weighting, some funds have delivered strong performance results.
Personally, I prefer pan-European funds to continental European funds for large-cap exposure. I also prefer focused funds that can invest across the region (including emerging Europe, when appropriate) without being constrained by index benchmark weightings. I'd be cautious about investing heavily in smaller companies now, and I'd consider offshore Dublin-listed funds in my investment universe. I'd also consider funds that generate a yield, rather than pure growth funds.
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