Analysis of the Europe ex UK offshore funds sector shows a number of funds have posted exceptionally...
Analysis of the Europe ex UK offshore funds sector shows a number of funds have posted exceptionally strong returns, although most have done so at the cost of greater volatility.
Of the 54 funds in the Micropal sector, the arithmetic mean return over three years to the end of January 2000 is 78.02%. The average one year return is 17.3%, the average return from February 1998 to January 1999 is 25.59% while average return from January 1997 through to January 1998 is 23.56%.
The arithmetic mean of the funds in the sector shows average annualised alpha of -0.88%, a beta of 0.99%, correlation co-efficient of 0.92%, R-squared of 0.85%, with annualised standard deviation of 22.88% and annualised annual return of 18.54%.
The top-performing fund over the three-year period is Henderson HF European, which is run by John Botham who is based in London. The fund has returned 145.57% over three years, which breaks down as 48.16% over one year, 42% from February 1998 through January 1999 and 19.26% from January 1997 through January 1998.
For this fund annual alpha is 11.59% and it has a beta of 1.09%, correlation coefficient of 0.9%, R-squared of 0.81%, with annualised standard deviation 37.68% and annualised return of 20.79%.
Botham took over the running of this fund three years ago and the performance it has achieved since then has been partly due to an emphasis on technology, media and telecoms.
He said: "This has not always been the case. For example, in the fourth quarter of 1998 we took up a highly defensive position after the problems in Asia and that loss-limitation is one of the key elements in our performance.
"Our approach is flexible and pragmatic. We believe that no single investment style can outperform in all market cycles. As a result, we are fairly top-down driven, aiming to anticipate and adapt to any market cycles and themes. At a stock-specific level there is no single valuation measure, rather we use a range of techniques to assess the outlook and growth prospects."
Botham is currently underweight telecoms.
"We have reduced our holding in incumbent operators such as Deutsche Telekom and Telecom Italia. We see continued pressure on these operators despite the attractive prospects for the mobile side."
He is increasingly concerned about stretched valuations in the technology sector.
"Expectations will have to be reset somewhat this year. There is still money to be made here, but investors will have to be more careful and more selective. Within the sector we still like mobile operators and infrastructure builders, as well as some of the semiconductor manufacturers.
"In the software area we like some of the internet design companies, focusing on those which operate on a business-to-business rather than a business-to-consumer basis.
"Although we are still positive on the outlook for earnings growth generally and for the market in the longer term, on many of our internal valuation measures we think it is now fully valued. In the short term it would not surprise us to see some sort of setback.
"As a result, we have been reducing our exposure to some of the more aggressive growth situations and recycling the money into more overlooked growth stocks, such as Netherlands-based publisher Wolters Klouwer."
Another fund that has posted exceptionally strong returns over the period is the Gartmore CSF Continental European fund.
The fund is run by Gartmore fund managers Roger Guy and Gillaume Rambourg. It has achieved a return of 140.2% over three years. This breaks down as 31.29% over one year, 39.11% from February 1998 through January 1999 and 32.25% from January 1997 through January 1998.
The fund has annualised alpha of 8.17%, beta of 1.2%, correlation of 0.97%, R-squared of 0.94%, annualised mean return of 36.82% and an annualised standard deviation of 21.25%.
Rambourg said: "This fund is run on a 50/50 basis, with 50% in long-term core holdings in highly liquid blue chip companies and the other half in short to medium-term opportunities where we see potential upside on a three to six-month view. These opportunities could, for example, arise where a company has been oversold or because of a management change."
The fund does not take extreme bets on a sector or country basis, with a limit on country divergence of 6%/-6% against the FTSE Europe ex UK Index, and for the main sectors a limit of 10%/-10% divergence. Additionally, no more than 5% portfolio allocation can be placed in any one stock.
Rambourg said: "Around 10%-15% of the portfolio is invested in small caps with a further 15%-20% in mid caps, with the rest invested in very liquid stocks. The overall approach and portfolio constraints have led to a high level of consistency in portfolio returns."
At present the fund is overweight telecoms, specifically mobile data providers. "There will be major growth there for the next two years. For a limited increase in capital expenditure, the revenue these companies receive will be massive."
Another overweight is Telco equipment. "For the last two years we have preferred Nokia, because of its higher visibility in handsets, but now we prefer Ericsson because of its higher visibility on the infrastructure side. We see scope for increased top-line growth here."
Rambourg is also positive on digital television and media content companies which has been played via stocks such as Canal Plus, whose price has quadrupled over the last four months. Thomson Multimedia is another holding. The fund is underweight financials, particularly insurance.
"We have been buying a few stocks back here because they have been de-rated so far. We have focused on the life rather than non-life companies.
"We are presently underweight banks. The increased transparency likely to be brought about by the internet should be detr
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