Peer group sees £8.5m outflow in May as three-year numbers disappoint, but average fund up 20.7% over one year
European markets have suffered from a good deal of volatility in the wake of the eurozone debt crisis, and, perhaps unsurprisingly, there has been a reduction in asset allocation to the IMA Europe including UK sector, culminating in a £8.5m net outflow in May.
However, according to Morningstar, the average vehicle in the IMA Europe including UK sector is up 20.7% over 12 months to 19 July. This is a significant improvement compared to the three-year view, which shows a decrease of 15.7%.
SVM All Europe SRI is the top performer over one year, up 32.8%. The worst performer over one year is M&G European Special Situations, up 5.7%.
Hugh Cuthbert and Neil Veitch are co-managers of SVM All Europe SRI, which is classified as a ‘light green’ SRI fund, because the only industries in which it does not invest are armaments, pornography and tobacco.
Veitch believes the fund’s investment universe is not too dissimilar from other pan-European and UK funds, and says this has helped performance. He also attributes strong performance to “good fundamental stockpicking.”
“We have an unconstrained mandate that enables us to seek out the best opportunities regardless of market cap, sector weighting or country, and therefore as long as the investment meets our SRI criterion we are free to invest in it,” Veitch says.
The manager adds the fund’s performance has been driven by his “relatively optimistic view” of a recovery in the global economy.
“It was not that we thought the world was going to be a fantastically better place,” he says. “It was just the stock market was discounting an outcome that was highly unlikely, such as severe recession or depression.
“We always felt with the instruments policy makers had at their disposable and the actions they were likely to take, that outcome was unlikely.”
As a result, he was positioned relatively early for a cyclical recovery.
He says: “This did not necessarily mean we wanted to be in the dash for trash or stocks which were structurally challenged.
“But there were a lot of very good businesses with strong balance sheets and margins that had been beaten down to levels that did not reflect the fundamentals.”
The fund has had strong success buying exploration and production stocks, such as Tullow Oil, and a number of engineering stocks including Melrose and IMI.
“Tullow Oil is still a big-cap name but at one stage in early 2009 it fell to as low as £5, £6 and £7 and is worth £11, £12 today,” Veitch says.
“Some of the engineering stocks were discounting an Armageddon type scenario. IMI on our analysis was discounting margins of 5% or 6% at the trough, and it was delivering margins of around 16% this year.”
Threadneedle has three funds in the Europe including UK sector. Launched in July 2004, Dan Ison’s Threadneedle Pan European Accelerando fund is ranked fourth over five years, up 44.4% compared to a sector average of 26.4%.Over one year, the fund is ranked sixth, up 28.8%.
Ison says the fund has outperformed over the last year because he has been avoiding domestically oriented companies. Instead he has focused on exporters benefitting from the weak euro and emerging market growth, driven by the Chinese consumer.
“We have managed to avoid value trap areas of the market over the last year by owning no utility or telecom stocks,” he says.
“In the second half of last year we had a reasonable weighting in financials. However, over the last six months we have been consistently underweight financials.”
Ison says outperformance is also due to successful stockpicking, and he believes Accelerando’s concentrated 30-stock portfolio means “we get more bang for our buck when we get it right.”
Contributors at a stock level include a large position in the travel reservations group Amadeus, which had a €1.7bn (£1.4bn) IPO in April. Other strong performers include engine manufacturer Saffron, and the mid-cap Finnish minerals processing firm Outotec.
Ison says: “We continue to hold and have strong performances from stocks such as Aggreko in the UK, and in the luxury sector Burberry and Swatch have done extraordinarily well for us.”
Michael Barakos’ JPM Europe Strategic Growth fund is ranked eighth in the peer group over one year, up 23.6%.
The manager believes the main driver of returns has been his growth investment style, which has performed well over the last year.
He points out indices such as MSCI Europe Growth and the MSCI Europe Value reveal growth has outperformed value in the last year by roughly 5%.
Barakos targets fast growing companies which are supported by positive newsflow.
“They need to be credible growth characteristics supported by continuous surprise on the upside in terms of earnings announcements and newsflow generally.”
He looks for stocks which have “decent medium-term price momentum”, because he says the stocks which have performed well in the last six to 12 months are more likely than not to perform well in the next six to 12 months.
He says: “It is those momentum characteristics we are using as a proxy for the newsflow – great earnings momentum and price momentum.”
Last year his growth strategy exploited the fact that value and growth became positively correlated in many instances.
As a result the portfolio has been overweight cyclical sectors such as automobiles, chemicals, materials, metals and mining, which has worked very well over the last 12 months.
“They all had phenomenal news characteristics and
were massively beating expectations over the last 15 months,” Barakos says.
“This continued into this year and most recently the Q2 earnings season.”
He adds: “It is not atypical for an auto firm or materials company to be seeing double-digit percentage earnings upgrades for 2010 and even 2011 estimates on the back of strong results.”
Technology stocks have also performed strongly, exhibiting “phenomenal growth characteristics”, the manager says.
“They have not necessarily been cheap or expensive, but they have benefitted from the huge restocking we have seen across the world over the last 12 to 15 months.
“They have also gained from the increase in cap ex we are seeing from corporates, albeit still cautious, particularly assigned to technology spend having refrained from spending over 2007 and 2008.”
