Using the Lipper Leaders scoring system to analyse the best performing funds in the IA Europe ex UK sector.
Investors are looking at Europe once more. Over three and five years, flows have been strongly negative. That has reversed over the 12 months to June, with inflows of £3.89bn.
It’s certainly not anything to do with enthusiasm over the region’s economic prospects. The Eurozone returned to growth in the first quarter of the year, exiting a technical recession (two successive quarters of contracting GDP). Although the European Central Bank was (along with Canada) the first to cut rates, there may not be much more imminent, as Eurozone inflation rates are above the UK’s.
Snap elections in France have left the political situation (to throw in a non-committal euphemism) “uncertain”. Germany’s ongoing economic malaise, being the only G7 economy to shrink last year, has led the Financial Times’ Martin Wolf to ponder as to whether it has resumed the role of “sick man of Europe”. The IMF, meanwhile, finds that pessimism over Germany has been “overstated” and “temporary headwinds should gradually fade over the next year or two”. However, the country faces sluggish productivity growth that is “likely to remain, absent reforms”, along with an aging population. Germany remains very much the Eurozone’s manufacturing hub, and, taken together, the two countries make up about half of the Eurozone’s Gross National Income.
That said, economic health is not the same thing as market strength. For instance, Japan seems to go in and out of recession like someone stuck in a revolving door without this impacting on the Topix’s returns, which had a strong run until the end of the first quarter.
So, let’s turn to what has been happening to Europe’s equity markets and equity funds.
European equity indices have lagged those of the US, the UK, and global over 12 months, although edging ahead of APAC and Japan, as the latter has had a poor Q2, giving up earlier gains. Sector contributions were mixed in the second quarter. Tech contributed the bulk of returns in the top-performing US, and to a lesser extent in Europe. The US market has about 30% exposure to IT. Europe ex UK has a third of that; the UK, much less. Consumer Discretionary—a significant exposure for Europe, and which performed well in 2023—detracted from European returns. France-based luxury group LVMH, for example, has fallen about 20% since mid-March.
IA sector returns over 12 months and three years to the end of June are 11.34% and 15.28% respectively. This compares with 12.43% and 10.15% for UK All Companies, and 21.08% and 30.27% for North America. There is a wide range of returns for Europe ex UK over three years: from 30.21% to -26.39%. So, as ever, fund selection matters.
What’s interesting is that four members of the table below are index trackers. It’s not unusual to have trackers in a sector, as these days there are many indices with particular style biases or niche focuses (for example, batteries or millennial-focused industries) that differ greatly from a broad geographical focus. However, these four are tracking a plain vanilla European large cap index, the Euro Stoxx 50, implying that most European managers have struggled to beat the market.
The top three on the table—Waverton European Dividend Growth, Artemis SmartGARP European Equity, and WS Ardtur Continental European funds—are multi-cap funds with a value bias, according to Lipper analysis. So, they are doing something different to the four large-cap core trackers in the table. For example, the Waverton fund has nearly 40% in Industrials and Healthcare, in contrast to the Euro Stoxx 50, with about 22%. On the other hand, Waverton and WS Ardtur have a much lower exposure to Discretionary. While the Artemis fund does, it seems to have no meaningful exposure to LVMH, which must has helped returns.
While Europe has limped behind the US (as has the UK), it may be worth considering some exposure for diversification purposes should market leadership rotate. Eventually it must, but you can lose a lot of money betting on when “eventually” is.
Table 1: Top-Performing Europe ex UK Funds Over Three Years (with a minimum five-year history)
All data as of June 30 2024; Calculations in GBP
Source: LSEG Lipper
This article first appeared in the July edition of Moneyfacts (p15)
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The views expressed are the views of the author and not necessarily those of LSEG Lipper. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. LSEG Lipper cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
