European equity funds managed by the likes of Man GLG, Baillie Gifford and Invesco Perpetual have been successful in making the most of rising markets in the years since the global financial crisis, contributing to their outperformance over the cycle. 
Following an extended period where they were unloved by investors, European equities are back in favour this year thanks to the European Central Bank’s stimulus package, increasingly positive economic data and relatively attractive valuations.
Data from FE Analytics shows that the MSCI Europe ex UK index has lagged the MSCI World by more than 17 percentage points over the past five years with a total return of 87.69 per cent. However, over 2017 to date European equities have beaten the global index by more than 8 percentage points, as shown in the below chart.
Funds with a focus on European equities are performing even better, with the average member of the IA Europe ex UK sector posting a year-to-date total return of 19.16 per cent. CF Miton European Opportunities is the best individual performer with a 28.37 per cent return, followed by Hermes Europe Ex UK Equity (up 28.26 per cent) and Jupiter European (up 28.23 per cent).
Performance of sector vs indices over 2017
Source: FE Analytics
The most recent Bank of America Global Fund Manager Survey, which examined the positioning of 179 asset allocators running a collective $516bn, found that eurozone equities were one of the biggest consensus overweights in October.
Ronan Carr, European equity strategist at the bank, said: “Europe is in vogue according to global investors, with the overweight in eurozone equities back near record highs and earnings-per-share expectations accelerating. European investors remain positive on the macro outlook and are looking for a global reacceleration.”
For those expecting European equities to continue to outperform, we looked for IA Europe ex UK funds that have been able to make the most of rising markets. In order to do this, we looked for the funds that have the highest upside capture ratio – which measures the performance in an up market relative to the benchmark – over the eight years of the current bull run.
The table below shows all the funds from the IA Europe ex UK sector that have an upside capture ratio to the MSCI Europe ex UK index in excess of 100 per cent (which suggests that during periods when the market is up, the fund did even better on average).
We’ve also added the downside capture ratio, which shows the fund’s relative performance in down markets as well as the total return generated since markets bottomed out from the financial crisis eight years ago.
Source: FE Analytics
As the table shows, Rory Powe’s £1bn Man GLG Continental European Growth fund has generated the highest upside capture over the eight years in question at 126.02 per cent. Given that the fund has also tended to outperform in falling markets, this has resulted in a 209.89 per cent total return – beating the index by close to 120 percentage points.
Powe, who made his name as head of European equities at Invesco Perpetual, runs a concentrated portfolio that is split into two camps: established leaders and emerging winners. Established leaders are stocks that are the strongest in Europe and can grow regardless of what happens in the economy; emerging winners are less mature but tend to have already established some competitive advantages.
In his latest update, the manager said the split was currently 85/15 in favour of established leaders. He added: “Our strategy continues to keep a distance from both the more economically sensitive sections of the market as well as those defensive stocks we consider to be too expensive. Instead the portfolio's sweet spot continues to be where we can find genuine and sustainable earnings traction for reasons which are as unique as possible to each company.”
While Man GLG Continental European Growth has outperformed the index with significant success, not all the funds on the list have.
HSBC GIF Euroland Equity has the second highest upside capture at 124.47 per cent but has made 60.55 per cent over the past eight years, lagging the MSCI Europe ex UK index by almost 30 percentage points. As the table shows, the €821.7m fund – which focuses on eurozone stocks – has tended to fall harder than the index in down markets.
The fund is not benchmarked against the MSCI Europe ex UK index. However, it’s important to note that it has failed to beat its MSCI EMU benchmark over the eight years examined, again outperforming on upside capture but underperforming on the downside.
Performance of funds vs sector and indices over 8yrs
Source: FE Analytics
On the whole, however, IA Europe ex UK funds with an upside capture of more than 100 per cent have a decent track record in beating the index. Of the 25 from the peer group that outperformed in rising markets, 21 of them beat the MSCI Europe ex UK index over the eight-year period.
Nine of these – Man GLG Continental European Growth, JPM Europe Dynamic Ex UK, SVM Continental Europe, Baillie Gifford European, Invesco Perpetual European Opportunities, Marlborough European Multi-Cap, T. Rowe Price Continental European Equity, GAM Star Continental European Equity and BlackRock European Dynamic – are in the sector’s top quartile over this time.
Another nine are in the peer group’s second quartile. These are the remaining funds that have made a total return of more than 100 per cent in the last eight years: Artemis European Growth, Smith & Williamson European Equity, Baring European Growth, Invesco Perpetual European Equity, JOHCM Continental European, Standard Life Investments European Equity Growth, JPM Europe, Invesco Perpetual European Equity Income and Waverton European Income.