Europe ex UK sector sees outflow of £126m as retail investors turn away from region
With the trend away from Europe-centric funds gaining momentum driven by fears for the euro, retail investors are increasingly turning away from the region. The IMA Europe ex UK sector saw a net outflow of £125.5m in April, while the FTSE Eurofirst 300 index of top European shares had slumped from a mid-April peak by around 9.6% by 10 June on concerns about the eurozone debt crisis.
However, Europe ex UK funds have generally benefitted from the rally in European shares up until April, with the average vehicle in the IMA Europe ex UK sector up 11.4% over 12 months to 10 June, according to Morningstar.
Alister Hibbert’s £282m BlackRock European Dynamic fund is ranked fifth over the past 12 months, up 25.9%.
His portfolio is also ranked fourth over three years with a 5.7% return, compared to a sector average fall of 14.9%.
The manager says performance was strong from April to September 2009 because he was heavily invested in high-quality businesses whose short-term outlook had been very disappointing.
“There was an opportunity in March 2009 to buy some world-class businesses on some of the lowest long-term valuation metrics we had seen for many years,” he says.
Financials led the way. with key positions in banks and insurance companies contributing significantly.
In particular, high conviction in banks KBC, UniCredit and EFG Eurobank bolstered performance.
In October, Hibbert started to replace financial holdings in the portfolio with companies more exposed to global markets.
“Luckily for investors, there are lots of those types of businesses in Europe, and we have had a very strong selection of those,” he says
“They have been benefitting significantly from what has been going on in emerging markets in particular.”
Hibbert believes there will be a mid-cycle slowdown for the global economy from the fourth quarter of this year and through 2011.
“This means for the average business it is going to be a bit of an uphill struggle. But we do not think there will be an economic train smash, or a double-dip global recession,” Hibbert says.
“We think the global economy may grow 3%, with emerging markets doing much better and Europe, the US and Japan much worse.
“We are still positively disposed towards equities. In a world with 3% global growth, there are plenty of good opportunities for us to make money for our fund holders,” he says.
Barry Norris’ Ignis Argonaut European Alpha has consistently generated top-quartile returns since its May 2005 launch.
The fund is ranked third over five years, up 72.4% compared to a sector average rise of 35.7%. On a three-year view it is ranked sixth, down 1.87%, and over one year is up 19.5%.
Norris says performance was lifted by his call last summer that the euro was overvalued against the dollar, against the widely held consensus.
He also saw some of the political and economic problems in the eurozone would lead to a weaker euro and a stronger greenback.
“Last summer we started to position the portfolio in both low-risk and high-risk stocks that would benefit from a weaker euro and a stronger dollar, and that has paid off,” he says.
The manager points out for most of last year the debate was about recovery and whether investors would want to own equities or risky stocks as an asset class.
“By stepping back from this and focusing on the currency angle, the fund has been able to do pretty well,” Norris says.
“This year there has been a significant move down on the euro against the dollar, and the fund has been ready and waiting for this.”
Norris admits investors’ attitudes towards European equities are currently highly risk-averse.
“Sentiment is probably worse than it was in 2008,” he says.
“There are lots of assumptions people are making at the moment in terms of outcomes in the eurozone.”
However, Norris believes the highly negative sentiment is misplaced.
He says: “We think, in general, people are being too pessimistic in assuming the euro is going to break up or the sovereigns are going to default and the real economy is going to slow drastically in the eurozone. If none of those things happen then European equities could deliver very strong returns,” Norris adds.
Another manager who gained from the rebound in financials is Invesco Perpetual’s Adrian Bignell, who manages the firm’s European Opportunities fund.
Launched in December 2007, the fund is the top performer out of 109 vehicles in the sector over one year, up 39.5%.
Bignell says: “We took the view not every bank was going to go bust and the winners would survive. So we started to buy into names such as BNP Paribas, Credit Suisse and Deutsche Bank.”
He also invested in cyclical stocks, and through them was able to participate in companies’ rights issues.
“A lot of people were sitting on the sidelines and therefore there was cash to recap some of these companies, so we participated in the recapitalisation of struggling companies,” he says.
The manager also remained committed to small caps, which he believes was another contributor to performance.
“A lot of them were sold down to nothing by hedge funds that were going bust or people moving out of the space and going into liquid, safe big caps,” he says.
By September the fund “had made a huge amount of money” and, Bignell says: “We started to take money off the table again. We started to take a more wait and see attitude, to see how the economic recovery would play out.”
The manager acknowledges problems with the euro have had an impact on his strategy.
“The faith in the euro is very low, especially across the Atlantic,” he says. “US investors see very little reason to be invested. You have to be aware there is a very big outflow going on from that side.”
He adds: “We are underweight the southern European Club Med countries. The backdrop is choppy with volatility.
“You need to be careful because some months there will be outflows so you need to take a bit of a long-term view to see through short-term volatility, which will continue.”
