The global financial crisis; the euro zone crisis; the Greek debt crisis. Europe has certainly had its fair share of problems over the past decade and, with 2016 well underway, the continent is now contending with sluggish global growth and a slump in commodity prices.
Against a backdrop of stagnant economic growth and record-low interest rates, many investors have favoured more defensive areas of the market. High-quality companies, with strong balance sheets, sustainable earnings, and often high and rising dividends, have therefore performed well in recent years.
On the other hand, more economically-sensitive industries have been shunned by investors, with sectors such as energy and financials - particularly banks - recently bearing the brunt of the pain. Funds investing in these out-of-favour areas of the market have therefore tended to fare worse than their counterparts focused on higher-quality, growth businesses.
The Neptune European Opportunities Fund is a case in point, which has faced a difficult start to the year. Rob Burnett, the fund's manager, has continued to increase exposure to financials over the past year, where 37.5% of the portfolio is currently invested. In particular the fund invests in a number of Italian banks, which have recently proven detrimental to performance (Italy is currently the fund's largest country weighting at 32.1%).
Source: Neptune, correct at 31/12/2015
In Rob Burnett's view, the European Central Bank's quantitative easing programme ought to eventually lead to higher interest rates, which should be supportive of European banks. He suggests the banking sector is now close to the cheapest it's been in its history, while there are also other potential positive catalysts in place, in the form of more attractive earnings, higher dividends and a softening in regulation .
While the fund's exposure to financials has recently acted as a drag on performance, there have also been a number of positive contributors to performance. Exposure to technology firms have recently helped performance, including a holding in Infineon Technologies, a German semiconductor manufacturer.
Please note that as a concentrated portfolio, each holding can have a significant impact on performance, although it does increase risk.
Our view on this fund
The Neptune European Opportunities Fund was removed from the Wealth 150 list of our favourite funds across the major sectors in January 2015. The fund had struggled to outperform the broader European market for several years and our analysis suggested the manager had struggled to add value through stock selection for some time. Since its removal the fund has fallen 3.5% while the IA Europe ex UK sector has risen 2.6%*, although please remember past performance is not a guide to the future and this is over a short time period.
|Annual percentage growth|
| Feb 11 -
| Feb 12 -
| Feb 13 -
| Feb 14 -
| Feb 15 -
|IA Europe ex UK||-11.4%||23.3%||12.1%||5.1%||1.5%|
Past performance is not a guide to future returns. Source: Lipper IM* to 01/02/2016.
In recent years the fund has been positioned to benefit from a euro zone recovery. Rob Burnett has favoured undervalued areas of the market and the fund has held a bias towards more economically-sensitive areas of the market. This has generally not worked in the fund's favour, although if the manager's views play out the fund could perform well. If he is wrong the fund is likely to struggle.
We currently feel there are superior alternatives for new investment in this sector, which feature on the Wealth 150.
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