Fund managers cautious in face of European volatility

Managers of European equities funds have reacted cautiously to the increasing volatility in European markets since January, according to Standard & Poor's Fund Services in its latest review.

"As market volatility has increased, managers have become increasingly cautious," said Peter Fuller, lead analyst on European equities funds at S&P Fund Services. "Fund performance has polarised between broadly defensive funds with significant large-cap exposure - as would be expected - and dedicated small-cap portfolios which, as of mid-May, seem to be hanging on to their earlier gains. It has been the middle-ground that has lagged."

Among the mainstream funds, the Europe including UK sector is keeping its nose ahead of its ex-UK counterpart. "This year's solid performers to date include Tim Stevenson and William Stormont (Henderson Horizon Pan European Equity Fund), Cedric de Fonclare (Jupiter European Special Situations Funds) and William Davis (Threadneedle IF European Fund)," said Fuller. Although their styles differ, all are experienced fund managers known for their consistently solid track records from disciplined approaches.

On the small-cap side, Fuller noted that David Dudding, manager of the Threadneedle European Smaller Companies Fund, and Charles Anniss, manager of the M&G European Smaller Companies Fund, are both enjoying success from applying a disciplined bottom-up, quality focus emphasising the industrials and consumer services sectors.

Fund performance in 2009 was dependent on managers' reactions to the rally in high-beta, low-quality companies that began in Q2. "From March to October 2009, the one strategy that outperformed all others was to invest in high-beta, low-quality small-caps on high price-to-book ratios," said Fuller.

The most obvious beneficiaries of the shift towards cyclicals were value managers, although the size of their success varied with their willingness to hold poor quality companies as opposed to financially sound companies that were simply out of favour. Only a handful of growth managers enjoyed the rally from the outset, with BlackRock being notable as a team that took an early stance in cyclicals and captured more of the rally than competitors.