European equity funds high on Irish cider

Magners Irish cider producer C&C Group was among stocks that contributed to strong returns for funds investing in European equities, says the latest update on the sector from
Standard & Poor’s Fund Services, available at funds-sp.com.

In the three months to the end of October, C& C rose almost 60% even though beverages as a sector underperformed. Funds which felt a noticeable benefit from the move included Standard & Poor’s AAA-rated New Star Investment Funds – European Growth Fund and the Standard & Poor’s AA-rated JPMorgan Funds – JPM Europe Dynamic.

The best performing European funds during the quarter were those in the S&P smaller companies ex UK sector, which returned 9.8%, followed closely by the pan-European smaller companies on 9.6%. Within the mainstream sector, the best performing sub-sector was Europe ex UK, where the median fund returned 8.7%, against the equity Euroland sector’s 8.3%. The laggard was Europe including the UK with a median return of 7.8%.

Said Standard & Poor’s fund analyst Alison Cratchley: “This was a continuation of the year-to-date trend in which Europe ex UK outperformed pan-Europe and smaller companies outperformed large-caps”. She noted that stock selection had been the key driver for the most successful fund managers, as in their various decisions to buy C& C Group, Dutch publisher Wolters Kluwer, Swiss insurer Baloise and Air France KLM.

The fund managers who underperformed during the quarter were held back by defensive positioning. For example, Standard & Poor’s AA-rated Franklin Templeton Investment Funds – Franklin Mutual European Fund underperformed its Europe including UK peer group mainly because of its relatively high (12%) cash position. This proved detrimental in rising markets although it is actively held by the team as a diversifier to market risk.
Meanwhile, performance at Standard & Poor’s AA-rated Cazenove International Fund – Pan-Europe Fund was held back by the fund’s overweight position in large-cap consumer defensives such as Carrefour, Heineken and Henkel, which had served the fund well during the second quarter’s volatility.

Looking ahead, most of the fund managers interviewed by Standard & Poor’s are cautiously optimistic, although they expect continued volatility, given the balance of positive and negative factors. On the positive side, European stocks are attractively valued (prospective PER for the MSCI Europe index of just over 14 times and a dividend yield of 3.25%). On the negative side are a possible US economic slowdown, rising short-term interest rates, a stronger euro against the US dollar and a rising oil price.

There are also signs that large-caps, which have long been out of favour with European fund managers, are beginning to make a comeback. Gary Clarke, who manages the Standard & Poor’s A-rated Schroder ISF – Euro Equity, plans to continue investing new cash inflows into large-caps, especially more defensive stocks with more stable and visible earnings streams. At GAM Star Fund – European Equity, fund manager John Bennett has increased his overweight positions in consumer-facing businesses such as telecoms and food retailing. He likes large-cap consumer-facing stocks and says there are plenty of areas of the market that have not re-rated beyond reason, notably media, retail and areas related to the German consumer.