A fund with a value approach and a bias towards small-caps – two areas that have been out-of-favour recently – leads the IA Europe Excluding UK sector on a broad spread of metrics, FE Trustnet research shows. 
This regular series reviews the performance of funds on their cumulative five-year returns up to the end of 2018 as well as the individual returns of 2018, 2017 and 2016, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown, and upside and downside capture relative to the sector average.
This week, we look at the IA Europe Excluding UK sector to find out which funds have the best average decile ranking for the 10 metrics, demonstrating that they have consistently been ahead of their peers for a wide spread of risk and return measures.
Performance of fund vs sector and index over 5yrs to end of 2018
Source: FE Analytics
The chart above shows the fund that achieved the best average decile ranking in this research: Marlborough European Multi-Cap. It scored 1.9 per cent thanks to a first-decile 81.72 per cent total return (the highest in the peer group) as well as top-decile numbers for its alpha, Sharpe ratio and upside and downside capture.
Headed up by FE Alpha Manager David Walton with Will Searle as deputy, the £345.9m fund offers exposure to the European growth and looks beyond the large-cap names typically found in portfolios in the sector. Reflecting Walton’s small-cap background, the fund has 32 per cent in small-caps and another 32.5 per cent in micro-caps.
In terms of geographic exposure, the largest country weighting is to Sweden (at 17.6 per cent) followed by France (13.8 per cent), Italy (11.6 per cent) and Spain (9.2 per cent).
Walton and Searle have a bottom-up approach that hones in on undervalued businesses. “Our strategy is to hold shares in well-managed companies capable of growing profits at an above-average rate, with a bias towards small companies which tend to be less well-researched than mid- and large-caps,” the managers explained.
Waverton European Dividend Growth is another IA Europe Excluding UK fund achieving a 1.9 average decile ranking in this research but is five-year total return of 48.38 per cent is far below that of the Marlborough offering (although still enough to sit in the peer group’s top decile).
The philosophy behind the £45.9m fund is based on the belief that markets are inefficient and aims to find wealth-creating companies that other investors have overlooked. Managers Charles Glasse and Chris Garsten have a bottom-up process that emphasises numerous company visits and a disciplined approach.
In order to identify wealth-creating companies, Glasse and Garsten search for five qualities in a portfolio holding: interests aligned (management working for the benefit of all shareholders), earnings visibility (predictable and with a reasonable degree of confidence), pricing power (through sustainable competitive advantages), cash generative (paying down debt, funding future growth, paying dividends and buying back shares) and return on capital (must be high or rising).
Source: FE Analytics
Fidelity European, which is managed by Samuel Morse, rounds out the top three thanks to its average decile ranking of 2.
Analysts at Square Mile Investment Consulting & Research, which gives the £2.2bn fund an ‘A’ rating, said: “The strategy employed by the manager ensures that the portfolio is made up of steady businesses. This fund is focused on taking longterm positions in companies that are believed to have the ability to grow their dividends in the future, with performance ultimately driven by the manager's skill in picking stocks.
“Morse has a history of acting as a safe pair of hands in the management of the funds that he has run. The fund is likely to underperform during periods of strong equity market returns and outperform in weaker, more volatile environments; this improves the fund's risk reward characteristics.”
The largest member of the IA Europe Excluding UK sector is the £5.3bn Jupiter European fund, which is headed up by FE Alpha Manager Alexander Darwall. As the table above shows, it has performed strongly in this research with an average decile ranking of 3.2 and a five-year return of 74.31 per cent (the second highest in the peer group).
Darwall’s approach focuses on finding companies that have long-term growth potential regardless of the economic backdrop. The FE Invest team, which has the fund on its Approved List, said: “Darwall has built up an impressive track record in European equity investing, and this strategy and style of buying high-quality global companies has now weathered a number of market environments.
“The fund could sit well as a core European equity holding, should investors believe that more globally oriented, higher-growth companies will continue to outperform a more balanced approach.”
The next largest funds in the sector are index trackers and tended to come out better than the typical active fund in this study. The £4bn SSgA Europe ex UK Equity Tracker has a 4.4 average decile ranking and ranked 27th out of 97 funds in this research, the £3.1bn iShares Continental European Equity Index (UK) scored 4.6 and came 37th, and the £2.9bn L&G European Index Trust scored 4.5 and came 31st.
Source: FE Analytics
Turning our attention to the worst-ranking funds in this research shows that FP Argonaut European Alpha occupies the bottom spot with an average decile ranking of 9.6.
The £73.7m fund aims to “achieve above-average returns” and has the target of having a top-quartile return profile when compared with other funds in its sector.
FE Analytics shows that it has achieved this goal in six of the past 10 full calendar years; however, in the other four years the fund was in the IA Europe Excluding UK sector’s bottom quartile.