Aberdeen European Equity, LF Miton European Opportunities and Waverton European Dividend Growth are the only active European equity funds to have beaten the MSCI Europe ex UK index in each calendar year since 2016.
European equity markets have endured a range of different market conditions during the past three years.
In 2016, Europe struggled with the fall-out of the UK referendum result to leave the EU and saw heightened volatility against a backdrop of surging populism and anti-EU sentiment.
However, populist eurosceptic politicians were defeated in elections for several key EU member states in 2017, assuaging concerns for the future of the bloc, while the European economy went on to grow faster than the US that year.
Last year concerns returned as US president Donald Trump pursued a harder stance over trade with China raising concerns over the impact on the Chinese economy and the knock-on effects for European exporters.
As such, just three funds have outperformed the MSCI Europe ex UK index – a commonly used benchmark for managers in the IA Europe Excluding UK sector – during what have been three very different years.
Source: FE Analytics
In addition, four passive strategies – Fidelity Index Europe ex UK, HSBC European Index, SSgA Europe ex UK Equity Tracker, Vanguard FTSE Developed Europe ex-UK Equity Index – have outperformed the index, although these track different indices than the benchmark in our study.
Below we take a closer look at the funds that managed to outperform the index in each of the past three calendar years. It should be noted that not all funds in the sector are benchmarked against the index.
Waverton European Dividend Growth
While each of the three funds has outperformed the index in each of the past three years, our first fund Waverton European Dividend Growth has outperformed the index in each calendar year since 2012. Like all of the funds in this study, it is five FE Crown-rated.
Overseen by FE Alpha Manager Chris Garsten and Charles Glasse, the £44.7m fund aims to generate income and capital growth through a concentrated portfolio of European equities at the larger end of the market cap spectrum, with a maximum of 40 holdings.
The fund was previously known as Waverton European Income and aims to identify wealth-creating companies that the rest of the market has overlooked.
The managers take the view that markets are inefficient and that by using a disciplined bottom-up process it is possible to deliver income and long-term capital growth through all environments.
Garstern and Glasse look for five key attributes: management aligned interest with shareholders; earnings visibility; pricing power; cash generative; and high or rising return on capital.
Performance of fund vs index over past five years
Source: FE Analytics
Between 2014 and 2018 the fund made a total return of 48.38 per cent compared with a 29.22 per cent gain for the index, which it is benchmarked against.
Top holdings in the fund include Swiss pharmaceutical firm Novartis, German telecommunications company Deutsche Telekom and French engineering company Gaztransport et Technigaz.
Waverton European Dividend Growth has a historic yield of 2.93 per cent an ongoing charges figure (OCF) of 1.30 per cent.
Aberdeen European Equity
Next on our list is the £186.4m Aberdeen European Equity fund, managed by the Aberdeen Standard Investments’ European equity team; it is benchmarked against the FTSE World Europe ex UK index.
In the three years between 2016 and 2018 the fund made a total return of 34.61 per cent compared with an index return of 23.85 percent.
The fund targets long-term capital growth from a relatively concentrated portfolio and currently counts 36 holdings.
The largest holding is Anglo-Dutch consumer goods firm Unilever, which represents 4.4 per cent of the portfolio. Other holdings above 4 per cent include Dutch brewer Heineken, good company Kerry Group and German software company Nemetscheck.
Aberdeen European Equity has an OCF of 0.87 per cent.
LF Miton European Opportunities
The final name on our list is a relatively young fund, having launched at the end of 2015: LF Miton European Opportunities.
Managers Carlos Moreno and Thomas Brown invest across the market cap spectrum, although the portfolio does have a substantial mid-cap bias where the pair believe the most attractive investment opportunities can be found.
The mid-cap part of the market is where the managers find the high-quality companies that they favour: those that can deliver a high return on capital sustainable over the longer term.
According to the pair, quality businesses tend to have substantial barriers to competition and are often less sensitive to external factors and the wider economy.
Other attributes that Moreno and Brown look out for are high and accelerating unit growth – whether driven by new products, market share gain or new markets – pricing power, or a shift towards higher margin products. Investee companies might also be benefiting from structural tailwinds, such as demographic changes.
Performance of fund vs index since launch
Source: FE Analytics
Additionally, the managers seek out companies where markets have not priced-in the long-term earnings potential of stocks rather than being too concerned with short-term movements in share prices.
During the three years between 2016 and 2018 the £364.5m fund – which has no specified benchmark – returned 50.32 per cent compared with a 23.85 per cent rise in the index.
“We believe that in markets like these it is more, not less, important to focus on the long-term fundamentals, to look for the few true growth companies and ignore the short-term noise,” the pair noted recently.
“We continue to aim for rough ‘macro’ neutrality by which we mean for every ‘cyclical’ stock we own we have a matching ‘defensive’.”
LF Miton European Opportunities has an OCF of 0.94 per cent.