Investing for Growth: Safe players win in volatile times
Wednesday 12 May 1999
Starting 1998 strongly, the FT S&P World Europe Index - the benchmark index for this sector - subsequently recorded a near 30 per cent fall (in dollar terms) from its highest level, before recovering most of this setback over the winter months.
Peter Jeffreys, managing director of Standard & Poor's Fund Research, one of the best regarded fund analysts in the industry, says: "Against this volatile background, mainstream Europe managers have shown the greatest divergence in performance in our research over the latest review period compared with any of the four previous discrete years we have looked at.
"Over 12 months to February, the top performing Europe mainstream fund outpaced the sector backmarker by more than 130 per cent. And within the mainstream funds the sector average performance was the highest for three years and ahead of the benchmark index."
Large company shares continued to outperform those of small companies, as money flows from European pension funds focused on the top 50 stocks represented in the Dow Jones Eurostoxx 50 Index.
But against this general trend, shrewd share selection in the small company arena enabled some funds to show exceptionally strong performance. Claire Griffiths, investing in companies below $1bn market capitalisation, produced a rise of 36.9 per cent for the Invesco European Smaller Companies fund. This placed her top of the Standard & Poor's Fund Research Smaller European ex-UK sector.
Griffiths' fund, with 12 others, has seen its rating upgraded Fund Research in its most recent screening of the European fund sector. A Fund Research rating reflects the group's current opinion of a fund's ability to stick to a consistent investment processes combined with the level of risk-adjusted returns it achieves.
The group's philosophy is that fund managers who stick to a disciplined investment processes and show strong management are more likely, over the long run, to provide consistent, above-average risk- adjusted returns, relative to other fund managers in the same sector.
The group monitors the performance of all the funds it has rated on a monthly basis, relative to other funds in their sector and a suitable benchmark such as a stock market index. Reviews are quarterly.
"When we go back to a fund to re-rate it we look at everything we first looked at," says Jeffreys. "We look for consistency of process - not necessarily doing the same thing year in year out but whether the fund manager is adapting their process to suit current market conditions.
"But we don't like dramatic change. It is a real danger sign when a fund manager who has been performing steadily for years suddenly goes through a bad patch and panics. Suddenly they turn over their entire portfolio and increase the percentage weighting in their top holding - in other words, take big risks. We reward the `Steady Eddy' fund managers who tend to perform the best over the long term."
The group checks if the same team is still supporting the fund's manager. "Perhaps their boss has moved on or perhaps they are reacting to a temporary hitch in the group's marketing strategy," says Jeffreys. "It can all have an effect on the fund's performance. If the fund has seen a flood of new money we would expect the manager to have put in place a sensible strategy for dealing with a bigger fund."
The pounds 225m Invesco European Smaller Companies fund has been upgraded from AA to AAA - the highest possible rating - after another year of very strong performance. Despite the general underperformance of small companies, this fund has outperformed most mainstream funds as well as ranking first over five years and second over both three years and 12 months in the Small Cap Europe fund universe. The team has been strengthened since Invesco's merger with GT.
"Stellar stockpicking over the past year has powered this fund's significant outperformance," says Jeffreys. "Griffiths' deep knowledge of companies in which she invests and her willingness to follow her convictions drive the fund. Her management style derives from the belief that companies with a strong market position, pricing power and motivated management can prosper regardless of economic conditions.
"Her approach can appear aggressive, but it is offset by investment disciplines as well as detailed company analysis. Griffiths is supported by two team members with an average of six years investment experience."
Griffiths attributes her rating success to a disciplined investment process and the performance record she has achieved in applying that process. "We have a strong team in place who analyse small European companies and we can call on the resources of the nine-strong European team at Invesco," she says.
She has had particular success on Germany's Neuer Markt of fledgling firms, which is earning itself a name for high quality offerings. "The future for funds investing in small European companies is very much going to be picking the right sectors," says Griffiths. "There are some pretty uninspiring small company industries with unsustainable earnings. But there are big opportunities in more dynamic sectors such as media, technology and services."
Another AAA upgrade success story is Newton Continental European Fund on the back of the fund manager Keiran Gallagher's continuing high performance, placing the fund in the top 10 per cent in its sector over five and three years and 12 months.
Fund Research's opinion is: "The consistency of this fund's performance is well demonstrated over the past 12 months when it outperformed in all phases of exceptionally volatile markets. This can be attributed to astute sector and share selection."
Gallagher attributes his recent boosted performance to an overweight position in the telecommunications sector, one of the group's key investment themes. "Telecom companies performed strongly, driven by the continuation of merger activity and, on the mobile phone side, strong cellular subscriber growth."
The last fund I want to highlight is Threadneedle European Select Growth which has also moved up to a top AAA rating. "Emphasis on a small number of favoured companies has been key to the fund's performance over the past five years and was particularly beneficial in 1998 when only a narrow range of companies performed well," says the Fund Research report.
"The style has helped fund manager Darrell O'Dea to avoid a number of disasters. He has achieved above-average performance in four of the past five years and, most remarkably, it is in the top 30 per cent of funds in the 12 months to March despite growth fund pounds 62m in March last year to pounds 233m today."
Next week I will look at some of the more notable A and AA-rated European funds which Jeffreys believes may be just as sound an investment bet.
Claire Burston is editor of Bloomberg Money magazine.
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