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The top European funds for both rising and falling markets

14 October 2021

In its latest series, Trustnet looks at the funds in the IA Europe Excluding UK and Including UK sectors to find out which hold up better in rising and falling markets.

By Jonathan Jones,

Editor, Trustnet

European stocks have been on a strong run this year after disappointing in 2020, as investors have looked through the pandemic and projected a strong recovery for the oft-maligned market.

The MSCI Europe index (which includes the UK) and the MSCI Europe ex UK index have made 11.2% and 10% respecitively in 2021, shy of the MSCI World index of global stocks, which is up 14.4%.

They were in touching distance from the global market thanks to a return to form for 'value' companies, which had propelled cyclical stocks higher, although this has slipped back in recent weeks.

Performance of indices in 2021

 

Source: FE analytics

Yet over five years the market remains a laggard, with both indices around 30 percentage points behind the global market, and over the past decade it is even starker both have underperformed global stocks by more than 100 percentage points.

While some investors will continue to shun Europe for richer pickings elsewhere, earlier this week Sam Witherow, manager of the JPM Global Equity Income fund, said he was allocating more to the region as it is set for a boom.

With this in mind, Trustnet looked at the top European funds that could beat the market during good times. For more information on the methodology, please read below.

The top European fund during rising markets over the past five years has been the £488m Marlborough European Multi-Cap fund run by FE fundinfo Alpha Manager David Walton.

The fund has an upside capture ratio of 175.4% anc came top among those funds that exclude the UK, although it has had a higher downside capture ratio.

It has a large weighting to small and micro caps, with more than 55% of the portfolio at the lower end of the market. Just 13% is in large caps.

Over five years, it has been the second-best performer in the IA Europe ex UK sector, returning 112.6%. All funds on the list below from this sector are among the top quartile of their peer group.

 
Source: FinXL

The highest upside capture ratio among funds that include the UK belonged to Comgest Growth Europe Opportunities, with a score of 166%.

Over five years it has returned 112.8% to investors, the best return among all 73 funds in the IA Europe Including UK sector with a long enough track record.

Although some expect Europe to blossom from here, others that have had their fingers burned in the past may wish to take exposure but look to limit their downside potential.

For these investors, the Lazard European Alternative fund has the best downside capture ratio in the IA Europe Including UK sector, although its upside has been poor and it sits in the bottom quartile of the sector over five years.

The long-short fund is aimed at capital preservation, with around 40 large- and mid-cap names supplemented by approximately 20 short positions. Over five years it has made just 5.8%.

Investors may therefore look to the Threadneedle Pan European Focus fund, which is a more traditional Europe fund that has made 85.5% for investors over five years while exhibiting lower falls during downturns.

 

Source: FinXL

Its downside capture score of 73.1% is the next best among IA Europe Including UK funds, while it has also beaten the market during the good times.

For investors looking to exclude the UK, MFS Meridian Continental European Equity has the lowest downside capture ratio of 71.6%, although it has struggled during rising markets.

The net of all of this has resulted in an 81.5% return over the past half-decade, a top-quartile performance among its IA Europe Excluding UK peers.

It is heavily weighted to healthcare, technology and consumer staples businesses, all of which have performed well for much of the past decade and thrived during the pandemic lows in 2020.

The only portfolio to appear on both lists is the Premier Miton European Opportunities fund run by Carlos Moreno and Thomas Brown. Returning 139.8%, it has been the best-performing fund from either of the European sectors over the past decade.

Run with a mid-cap bias – although it can invest across the market spectrum – the fund is around 22% weighted to Nordic companies, with more traditional markets such as Switzerland, France and Germany at lower allocations.

The portfolio is style agnostic, with the defensive, quality-growth companies in the fund expected to beat the market when times are tough, while its cyclical stocks should outperform when markets rally.

As such, the trust has an upside capture ratio of 161%, the third-highest among all European funds while its downside is the fourth-best at 74.4%.



Methodology

In this series, we looked at upside and downside capture ratios, which measure how much a fund has risen or fallen relative to a benchmark index over the past five years. For Europe ex UK funds, we used the MSCI Europe ex UK, while for those than include the British market, we used the broader MSCI Europe index.

If a fund has a downside capture ratio of 100%, the fund has lost the same amount as the market. A ratio of 50% shows that if the market were down 10%, the fund would be down 5%.

Similarly, 150% would imply a 15% drop if the market fell 10%. The opposite is true for upside – a score of 150% would imply a 15% rise if the market were up 10%.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.