Expected Growth failing to materialise is key to poor performance of many European funds
Since the end of the strong bull market in 2001, European equity funds have faced difficult times. Most have experienced falling returns and some have struggled to keep volatility down.
The Metzler Euro Growth fund has achieved average performance over the period, with high volatility.
According to Carmen Weber, manager of the pure growth fund, the past one-and-a-half years have been difficult for the fund because, 'stocks we thought were growth stocks turned out to be cyclical.'
In line with the markets, volatility on the fund was high during this period, reaching a peak in 2001, she said. Benchmark risk, in terms of standard deviation, was 30%.
Problems began in October 2000, mainly due to a misconception about which stocks were growth.
'In the fourth quarter of 2000, the whole disaster started to materialise,' Weber noted. 'Analysts and companies didn't guide in the right direction. It was difficult to sort out whether companies would be able to maintain growth rates. We were surprised by the negative side in many names.'
Last year was a difficult period for the fund, exacerbated by the terrorist attacks on 11 September.
Weber said: '2001 was difficult in the sense that we not only had the attacks in September but were convinced we had seen a major low in March. Based on that judgement, we felt some relief on the macroeconomic side was due and that is where we positioned the fund. When it turned out that, in summer, the economy went down again, it caught us on the wrong foot.'
The fund had driven down its tech stock holdings before 11 September but began to increase them afterwards, detecting a market recovery.
Since the beginning of the year, the weighting in tech stocks has been brought down again and overall volatility in the fund has dropped, according to Weber.
While there is a recovery, many excesses still need to be unwound, especially in technology, she said. With this in mind, it is difficult to call technology a growth area, she added.
There are good growth areas without excessively valued stocks, according to Weber, but picking the right companies is vital. One such area is food and beverages.
The years 1998 and 1999 were good for the fund, with many opportunities in the markets. The period was a typical growth environment, with low inflation, high growth rates and enough liquidity in the markets.
However, oil price rises transferred to core inflation rates, which, in turn, took their toll on the markets, putting an end to the growth environment, Weber said.
She predicts this year to again be flat to down in terms of fundamentals and earnings, with recovery coming next year.
The GAM Multi-Europe fund of hedge funds, managed by David Smith, has performed well, with low volatility compared to the average for European equity funds.
Returns were high in 2000 when the fund pursued a long, growth-orientated strategy spurred on by the end of the strong bull market.
Smith moved aggressively out of this strategy early in 2001, taking down long exposure in the fund and moving to more market-neutral strategies.
'In hindsight, we were three months too early,' he said.
Since then, the fund has made modest returns.
'What we have done is make money out of market-neutral strategies while long-short strategies have been flat and long-only exposure, which we keep just in case the markets take off, has lost money,' Smith said.
This has been the story of the fund for much of the past two years. 'The key is not to lose money when the market loses money and to come back strongly when it rallies,' Smith said. 'I have been conscious of the fact I promised people I would protect their capital in difficult times.'
The fund's low volatility has been caused by low growth exposure in the portfolio, he added.