While US companies were the overall leader in 2013, the MSCI Europe index surpassed the returns of the FTSE All Share, ending the year up 21.38 per cent, according to FE Analytics.
Performance of indices in 2013
Source: FE Analytics
As a result, more investors are looking to Europe than the US for long-term growth and cheaper valuations.
In a previous FE Trustnet article, Stuart Mitchell, founder of European specialist equity house SW Mitchell, said this disparity in valuations actually makes European equities less of a risk to investors than those in the US and UK, as it limits the downside.
With this in mind, FE Trustnet highlights the funds in the IMA Europe ex UK and European Smaller Companies sectors that have performed well on a risk-adjusted return basis in 2013. Could these be the funds to play a European recovery?
IMA Europe ex UK
Much like in the UK, the shining stars of the IMA Europe ex UK sector over the past 12 months have been those that have reaped the highest returns relative to the level of volatility they have taken on.
Source: FE Analytics
The CF Odey Continental European fund, managed by FE Alpha Manager Feras Al-Chalabi, had the highest Sharpe ratio of any fund in the sector, at 2.72. The fund was the sixth best-performing portfolio in 2013, returning 37.91 per cent, compared with 26.13 per cent from the sector.
Performance of fund vs sector and index in 2013
Source: FE Analytics
A suite of Invesco Perpetual funds also ranked highly on a risk-adjusted return basis: the four crown-rated Invesco Perpetual European Equity Income fund, Invesco Perpetual European Opportunities and Invesco Perpetual European Equity. The little-known €150.7m J Chahine Digital Stars Europe ex UK fund also placed highly.
However, unlike their UK counterparts, the leading funds in 2013 had an exceptional year relative to their medium-term history. Only two funds that ranked in the top-10 according to their risk-adjusted returns in 2013 also made it into the top-10 over three years – Invesco Perpetual European Equity Income and Invesco Perpetual European Opportunities.
Over three years, the standout funds in the sector are the four crown-rated FF&P European All Cap Equity fund, the four crown-rated Scottish Widows HIFML European Strategic fund and the five crown-rated Henderson European Focus portfolio.
The Scottish Widows and Invesco Perpetual European Equity Income funds are the best-performing over this period, with returns of 45.84 per cent and 43.52 per cent, respectively.
Two funds that made the top-10 of risk-adjusted funds over one year were not in the top-10 on a total return basis – Ecclesiastical Amity European, which delivered top-quartile returns, and Artemis European Growth, which beat the sector average, but fell into the second quartile over one year.
The Cazenove European Income fund does not yet have a three-year track record.
IMA European Smaller Companies
The leading fund in the sector in 2013 was Ignis European Smaller Companies, which gained an impressive 48.33 per cent while the sector picked up 30.83 per cent, according to FE Analytics. The fund also had the highest Sharpe ratio, at 3.79, over that period.
Performance of fund vs sector and index in 2013
Source: FE Analytics
The only fund in the top-five on a risk-adjusted basis that did not also reach the top-five on the performance tables was Lazard European Smaller Companies.
It was trumped by the JPM Europe Smaller Companies portfolio, which was the second-best performing fund in 2013 on a total return basis, but sixth in terms of risk.
Source: FE Analytics
There is inherently more risk in smaller companies, particularly in Europe where investor sentiment has swayed widely, but a number of funds that performed well on a risk-adjusted basis over one year have also done so over three.
The Ignis fund had the third-highest Sharpe ratio over three years, at 0.54, while the Lazard fund came in second.
However, the funds that have proved their mettle over the medium-term are the five crown-rated MFS Meridian European Smaller Companies fund, which is also the best-performing over three years, and the Threadneedle Pan European Smaller Companies fund, managed by FE Alpha Manager Philip Dicken.
In a previous article, FE Trustnet looked at the best UK portfolios on a risk/return basis.
