The past three years has seen funds losing a third of their value then reviving with positive performance in the past 12 months
Performance in equity Europe ex UK funds over a three-year period has been dismal. The top three year performance figure is -15% from a Canada Life fund and the bottom is the Invesco GT Euro Growth fund which plummeted a substantial 61%. While the average fund lost 34% over three years, things are now picking up. The past year has seen a revival - the first positive performing 12 month period since August 2000 ' with an average fund return of 7.7%.
The Mellon Continental Euro fund performed well over a three-year period, with the bulk of the outperformance attributed to the past two years.
Raj Shant has been running the portfolio for the past year and a half. He explains that the fund had a defensive position from August 2000 that continued throughout most of 2001. During this time the main theme of the fund was to focus on the erosion of pricing power because of over borrowing and over capacity in the market place. The management company, Newton, calls this theme the 'ice age' because when there is that much debt things can only cool down.
The focus has been on companies that offered good balance sheets and cheap valuations. Prominent sectors included basic industries and cement companies.
Shant says: 'That worked well for 2000-2001. The only disappointment was following 11 September as when the stock market bounced back it was in companies that were considered to be the worst performers.'
In between August 2001 and August 2002 the fund dropped to the 25th percentile from the 7th percentile the previous year. In the past year the portfolio has gone down again to the 50th percentile.
Shant says: 'The portfolio had gone down because the markets had gone down. When the market rallied sharply in April and May this year the companies that gained the most were priced as if they were going to go bankrupt. The portfolio was positioned in companies that were repairing their balance sheets.'
The Threadneedle Euro Growth fund was also one of the better performing portfolios and was ranked eight out of 73 over a three-year period. William Davies is manager of the portfolio. Throughout the three-years it has had varied performance.
In between August 2000 to August 2001 the fund was ranked in the 26th percentile ' at the bottom end of the top quartile. This was because the portfolio had been positioned heavily in TMT stocks. While Davies had started taking money out of the sector to put it in more defensive areas such as food manufacturers and pharmaceuticals, it was not sufficient to avoid all the falls in the markets.
However, performance of the portfolio improved from August 2001 to August 2002 and it was ranked in the 4th percentile. Davies says the defensive positioned paid off because economic growth did not come through. Following the 11 September the markets continued to fall substantially. Davies started to invest in economically sensitive stocks as he believed that the Fed would cut interest rates to help revive the economy. Towards the end of the year the markets bounced back.
Over the last year the portfolio has suffered and it fell back to the 57th percentile. Davies explains this was because the portfolio did not do well following the war in Iraq. He did not put the portfolio into a defensive position but rather added to economically sensitive stocks such as banks.
Although the Bank of Ber-muda All Points Multi-Manager Europe fund has been among the bottom performing funds, over the past year it has had a tremendous improvement in performance.
Sebastian Dunn, head of investment management at Bank of Bermuda, says: 'In between August 2000 and August 2001 the portfolio suffered as the global economy slowed, leading to weakening corporate profit growth and investor sentiment. The growth bias of the portfolio makes it particularly sensitive to economic cycles. We recognised that the economic climate was deteriorating, however the depth of the downturn was misjudged, and this had a dramatic impact on growth managers.
'Names that hurt performance included Koka, Adva Optical and Qiagen. Sector selection is a by-product of stock selection, which emphasises future growth prospects, superior management capabilities and strong cash flow. On a sector basis, the portfolio favoured media and technology companies, both of which suffered severely during the second half of 2000. Performance continued to deteriorate in 2001, as sentiment became increasingly negative and selling pressures spread to non-technology sectors of the market. Action was taken to lower the portfolio's growth bias, but it failed to be sufficiently aggressive,' Dunn says.
In between August 2001 and August 2002 the fund only improved performance slightly.
Dunn believes the performance was obtained as the portfolio maintained its growth bias. The portfolio remained focused on high quality cash generating businesses with strong market positions that would benefit from a recovery in corporate investment and business activity.
However, in between August 2002 and August 2003 the fund performance improved dramatically. It was ranked in the 11th percentile.
Dunn says: 'Last year saw a slow transition towards improving company fundamentals and attractive valuations. With the global economic outlook showing signs of recovery, we have positioned the portfolio to capitalise on this momentum by shifting the portfolio away from counter cyclical sectors such as consumer staples, energy and utilities and into more cyclical sectors such as consumer discretionary. The growth bias remains and has been a positive factor in recent performance.'
Old Mutual International had five portfolios that were in the bottom third of funds. Over a three-year period the OMFM(G) European Growth fund was ranked in the 65th percentile; the OMG European Stockmarket fund was ranked 66th; the OMHK European Stockmarket fund was ranked 67th; the OMIG European Stockmarket fund was ranked 68th; and the OMII Euro Stockmarket fund was ranked 69th.
All of these funds, while almost the same in content, differ in performance simply due to differences in cashflows impacting the timing of trades. So it will be of benefit to look at just one ' say, the OMG European Stockmarket fund. According to OMI, the portfolio suffered from August 2000 to August 2001 due to an unexpected broadening of the market decline, which had previously been concentrated in the technology sector. The release of earnings warnings, including further technology warnings, led to stock devaluation in many sectors.
Relatively high levels of inflation and low levels of domestic growth had suppressed investor confidence and reduced earnings ratios.
The fund was underweight in oils and pharmaceuticals, which outperformed, and index neutral in technology stocks, which under-performed. Some individual stocks held for their underlying fundamentals were punished by the market for short-term difficulties and for being in unpopular sectors.
In between August 2001 and August 2002 the fund's overweight position in TMT ' the weakest performing sector over the period ' was a negative influence on performance. Performance was also negatively impacted by the position in materials.
From August 2002 and August 2003 the OMG European Stockmarket fund improved to the 67th percentile.
In August 2002 the management of the fund transferred from OMAM(UK)'s European Desk to their structured equities team. The fund is now being managed on an active quantitative basis, which imposes a rigour and discipline on the investment process during periods of market turbulence. In terms of investment strategy, the approach focuses on several market drivers or factors in order to add value relative to the benchmark.
The period started with the portfolio being underweight financials and technology and overweight consumer discretionary and materials. During the period, the underweight position in financials was reduced while healthcare went from neutral to significantly underweight.
The main underweight positions are now financials, healthcare and technology, and the main overweight positions remain consumer discretionary and materials. All sector positions were derived from combinations of valuations and momentum measures taken from the stock selection modelling process.
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