Many people prefer to organise their UK holdings separately and, in effect, subscribing to a fund in this sector cedes the allocation decision to the fund manager. There is also the distinct possibility of overexposure to certain stocks if the including-UK fund duplicates those held by an investor's UK-only fund.
That said, can we find some advantage in this approach? There is, of course, the convenience of a one-stop shop for investors who have no strong preferences about the UK element in a Europe-wide approach. This is predicated on the conviction that one is buying into a skilled professional who will take the more beneficial allocation decisions.
But, the relative lack of popularity of this view is perhaps illustrated by the fact that this already small sector has dwindled to just 22 funds, down from 26 two years ago. The Europe ex-UK group contains 113 members. Let us turn to Financial Express's data to examine the effect that including or excluding the UK has on performance.
Top 5 Europe inc UK, 3yr
| Fund | % return |
| SVM All Europe SRI A | 23.9 |
| Threadneedle Pan European Ret GBP | 17.1 |
| Newton Pan European SIS GBP | 14.8 |
| M&G Pan European A Inc GBP | 10.1 |
| Fidelity Pan European Inst | 9.9 |
At the sectoral level, neither did very well in the past 3 years of crunch and crisis. While monumental losses were avoided, total return for the non-UK group fell 6.95 per cent, but the inclusion of the UK put a further drag on total returns, with a drop of 7.65 per cent. It does not all move in one direction, though. When it came to risk, the UK had a mitigating effect on the inclusive sector, which posted volatility of 22.5 per cent against the Europe-only tally of 24.2 per cent.
Getting down among the funds, though, does not necessarily bear out this scenario. Over the 3 years, the best performer out of both of these groups was the BlackRock European Dynamic fund, which is ex-UK. Against the negative sector record, this fund logged a gain of 18 per cent. The nearest the inc-UK sector could produce was SVM All Europe fund, with a total return of 11.7 per cent.
Then, as we measure results over the past year of mini-rally, the positions reverse. Both funds are still top of their sectors, but SVM turns in an 88.8 per cent gain while BlackRock sits back on a 61.5 per cent rise.
But here's the rub: the mitigating effect of the UK on risk is not apparent in SVM's performance. The fund records 3-year volatility of 29.2 per cent, while BlackRock holds this down to 27 per cent. Some investors might find this insignificant given the returns generated, but this is where we dig into the risk/reward statistics.
Both funds clocked up comparable Sharpe ratios of 0.7 and 0.8, so we know in broad terms that whatever the level of risk taken on, it has been rewarded. Things look different, though, when we come to the acid test: Information Ratio. Since this strips out from the fund's return a notional risk-free rate and the return attributable to the benchmark, we can gauge how much extra gain has been generated for each unit of risk that attaches to it.
On this count, SVM turns in an Information Ratio of 0.62, which is good by anybody's standards, and shows that the inclusion of the UK has not held the fund back. It is a case of 'nice try, but no cigar', though, because BlackRock showcases its stock-picking talent with an Information ratio of 1.15 and steals the thunder.
This article first appeared in Investment Adviser.