Investec Global Special Situations, Orbis Global Equity and Threadneedle Global Extended Alpha are among some of the best-rated global equity funds with the biggest regional underweights to Europe, data from FE Analytics shows.
European funds have benefited from strong returns in the equity market, year-to-date, which are partially the result of increased political stability and attractive valuations relative to other markets.
Year-to-date, in fact, the MSCI Europe ex UK index has comfortably doubled the returns of all other major developed market indices, as the chart below shows.
Performance of indices in 2017
Source: FE Analytics
While some investment professionals believe there are enough drivers for its outperformance to continue, others are more reticent.
In an article published on Wednesday, Rathbones’ Strategic Asset Allocation Committee warned that a combination of slowing growth, the strengthening euro and the region’s large number of non-performing loans could spell trouble for investors.
“There are signs that strong returns on European equities could be coming to a halt,” it said. “Political risk is not as high as some may think, and fund managers see value in the financial and consumer discretionary sectors.
“However, we are cautious on the outlook for further gains in European equities given growth appears to be peaking.”
For those who are nervous about rallying European equites – or indeed, are looking to dovetail their European exposure with a diversified global fund – we looked at the four or five crown-rated funds with significant regional underweights relative to the MSCI AC World index.
Out of 333 funds in the IA Global and IA Global Equity Income sectors, 12 of them hold less than 16.3 per cent of their portfolios in European equities, are in the top quartile relative to their average peer over five years (although past performance is no guide to future returns) and have been awarded at least four FE Crowns by our research team.
Source: FE Analytics
As can be seen above, the fund with the lowest regional weighting to Europe at just 2.7 per cent is Investec Global Special Situations, which has four FE Crowns and is £43m in size.
Headed up by Alessandro Dicorrado and Steve Woolley since the start of 2016, the fund aims to provide long-term growth through a concentrated portfolio of 40 stocks. It does so through holding companies the managers deem to be undervalued and out-of-favour, but which have strong balance sheets. Examples of its largest individual holdings include Bank of America, Microsoft and UK kitchen solution manufacturer Welbilt.
While the managers choose their holdings on a stock-by-stock basis, their largest regional weighting is to North America at 43.1 per cent, followed by the UK at 24.9 per cent and the Far East ex Japan at 10.8 per cent.
It has outperformed its average peer and benchmark by 37.32 and 25.69 percentage points respectively with a total return of 122.42 per cent.
The next fund on the list for its low European equity weighting is Orbis Global Equity at 9.4 per cent.
The four crown-rated fund has an active share – which measures the differentiation between the fund’s positioning and its benchmark’s – of 89 per cent. Aside from being underweight continental Europe, it is also underweight North America but is significantly overweight Asia ex Japan.
As with Investec Global Special Situations, manager Dan Brocklebank selects his holdings on a bottom-up basis. He also maintains a markedly long-term time horizon and aims to look through market noise to find attractively-valued opportunities.
Over five years, the £35m fund has returned 129.72 per cent compared to its average peer and benchmark’s respective returns of 85.1 and 103.34 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Hot on its heels with a European equity weighting of 9.8 per cent is the four crown-rated Threadneedle Global Extended Alpha fund, which is co-managed by Neil Robson and Ashish Kochar.
The £227m fund has a highly-diversified portfolio of 106 holdings, which comprises both long and short positions. For instance, the fund currently has a 120 per cent weighting in long positions alongside a 20 per cent short book. The managers believe this approach can allow the fund to make money in both rising and falling markets.
In terms of net regional exposure, the fund’s largest weighting is in US equities at 68.1 per cent. Aside from Europe, its other larger net regional positions include China at 5.7 per cent, Japan at 3.7 per cent and Hong Kong at 2.5 per cent.
Over five years, it has outperformed its average peer and benchmark by 41.54 and 29.61 percentage points respectively with a total return of 126.34 per cent.
The largest fund to have made it onto the list – with an AUM of £4bn – is Pictet Global Megatrend Selection which, unlike the first two funds mentioned, identifies sustainable and secular changes first and foremost and will then invest in stocks that are set to benefit from these drivers.
The fund can be seen as a ‘best ideas’ portfolio of Pictet’s thematic funds. In terms of sector weightings, it currently has the most exposure to information technology at 22.9 per cent, followed by industrials at 19.3 per cent and healthcare at 15.4 per cent.
When it comes to equity region, it has 56.1 per cent in the US, 13.4 per cent in continental Europe, 7.7 per cent in Japan and smaller weightings elsewhere.
Over five years, the fund has returned 109.76 per cent compared to its sector average and benchmark’s relative returns of 85.1 and 103.34 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Second on the list for its size at £3.2bn is Lindsell Train Global Equity, which is headed up by Michael Lindsell, FE Alpha Manager Nick Train and James Bullock.
As many investors will know, the fund adopts a highly-concentrated, bottom-up approach to stock selection with an emphasis on quality and brand strength. Examples of its largest individual holdings include Unilever, Diageo and Heineken.
In terms of regional exposure, the five crown-rated fund has 32.6 per cent in the US, 26.1 per cent in the UK, 22.9 per cent in Japan and 13.8 per cent in continental Europe.
Over five years, the fund has outperformed its average peer and the MSCI AC World index (which it is not benchmarked against) by 67.69 and 56.06 percentage points with a total return of 152.79 per cent.
Other highly-rated funds on the list with regional underweights to Europe include Morgan Stanley Global Opportunity, T. Rowe Price Global Growth Equity and Old Mutual World Equity.