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European quarterly fund review – a tale of two halves

We look at how European stock markets, economies and Wealth Shortlist funds have fared over the past 12 months, and share our outlook for European stock markets.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The pandemic’s had a devasting effect on global economic growth over the last 12 months. Its impact has prompted a wave of responses from governments and central banks around the world, from emergency interest rate cuts to huge government borrowing.

GDP, a measure of growth in the economy, in leading economies fell sharply in the first three months of 2020. Eurozone GDP slumped further in the second quarter. Economies did start to recover, but progress was interrupted by fresh lockdowns as the virus and new variants flared up.

Stimulus measures to try to get the economy going again included a €750 billion EU pandemic recovery fund. The EU also committed to long-term stimulus and environmental spending, in the form of the EU Green Deal. These initiatives have since prompted interest in the long-term prospects for a range of European companies in renewable energy and infrastructure.

Vaccination rates in the EU remained relatively low compared with some other regions, and rising coronavirus infections drove new or extended lockdown measures in a number of countries. Meanwhile, the European Central Bank (ECB) picked up the pace of its bond buying to help prop up debt markets.

Some economic data gives grounds for hope that a recovery is now underway in Europe. The EU forecast that the Eurozone economy could grow to reach its pre-pandemic size in 2022. Economic sentiment has also recently jumped, reflecting expectations of improved conditions.

The economic story feels broadly bleak. But company share prices tell a tale of two halves.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice.

How did Europe’s stock markets do?

Like most major global stock markets, the broader European stock market took a tumble in March 2020. It’s since recovered well, climbing 26.6% over the past year*.

Europe’s major markets, like France and Germany, have posted decent returns. The outlier is Switzerland which has returned 10.4% over the past 12 months, though this is still a good return. The Swiss market with companies like consumer staple Nestle and healthcare giants Roche and Novartis has been left behind.

Chart showing the performance of European markets

Scroll across to see the full chart.

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/05/2021.

Sectors more closely linked to the health of the economy like banks, industrials and basic materials did well. But more stable and defensive sectors like healthcare, food producers and telecoms were weaker, especially since November 2020.

Chart showing European sector performance

Scroll across to see the full chart.

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/05/2021.

What about different investment styles and company sizes?

European smaller companies outperformed larger European stocks, which builds on over ten years of outperformance. Larger companies did better during the worst of the pandemic last year though.

In terms of style, the discovery of an effective vaccine was the catalyst for ‘value’ investing to start to outperform ‘growth’ investing. Growth investing focuses on companies able to grow their earnings and cash flows significantly ahead of expectations or the wider market. In the years since the global financial crisis these companies performed well. Lots of these companies are in the consumer staples and technology sectors.

In the post-pandemic fallout, inflation and the expectation of rising interest rates, which can dampen the prospects of growth companies, have picked up. Some investors have rotated from growth to value investments, though it’s still too early to tell if this is a longer-term trend. Either way, it’s a reminder of the benefits of having a diversified portfolio.

Chart showing performance of different investing styles in Europe

Scroll across to see the full chart.

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/05/2021.

Looking Ahead

With the evolving battle against the pandemic and the threat of mutations, market ups and downs are likely. There are also political changes in Europe with German Chancellor Angela Merkel stepping down later in 2021. Brexit tensions also simmer beneath the surface and geopolitical issues still exist between the major democracies of the world and China and Russia.

European shares have staged a tentative comeback over the last year after underperforming the US and wider global markets over the last decade. The US is over-represented in industries like technology, which have done well for quite a while (over the past decade), while Europe is more exposed to financials, which have had a tougher time over this period.

However, Europe has market leading companies that make money across the globe and look good value compared with some other markets. This, together with the value rotation, could herald a period of European market outperformance, although nothing is guaranteed.

How have the European Wealth Shortlist funds performed this year?

European funds on the Wealth Shortlist have delivered mixed performance over the past year. We usually expect this though, as it's in line with how we select funds for the Shortlist. If all funds in a given sector are performing well at the same time, they're probably investing in similar areas. Those same areas won't perform well all the time, so it can be painful when they're out of favour.

The European funds on our Wealth Shortlist all use different investment approaches, but focus on ‘quality’ companies. This type of company fell out of favour at the end of last year, and companies more closely linked to the health of the economy performed better. This means our favoured funds haven’t performed as well as the broader market over the past year.

We continue to believe these funds use proven investment processes that can drive long-term performance. A bias to quality companies could provide a smoother ride for long-term investors, but performance might lag in more exuberant markets. As always past performance isn’t a guide to future returns and there are no guarantees.

All investments fall as well as rise in value, so you could get back less than you invest. For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Threadneedle European Select

The Threadneedle European Select fund returned 22.4%* over the past 12 months to the end of May 2021, which lagged the broader market return of 26.6%. The fund outperformed during the onset of the pandemic due to its focus on higher quality companies. But these companies were left behind in the post-vaccine recovery. The manager favours a relatively concentrated portfolio which can increase risk as performance relies on fewer shares. If some fall out of favour, that can have a bigger impact on how well the fund does.

German chemicals distributor Brentag and Danish transport and logistics group DSV Panalpina performed well. German software company SAP and food delivery company Just Eat dragged on performance.

The fund managers made new investments in Allfunds, an investment platform. They also added Siemens Healthineers which has a strong advanced therapies business. They sold investments in Adidas, which had recovered after the initial virus setback in spring 2020. Elis, the French-based provider of laundry services, was badly affected by the virus and the lockdowns that followed.

TM CRUX European Special Situations

The TM CRUX European Special Situations fund returned 21%* over the past 12 months. It aims to invest in both large and higher-risk smaller companies that have a clear business strategy and good quality management. However, the market has favoured higher-growth companies and more recently out-of-favour companies.

Swiss logistics business Kuehne and Dutch industrial manufacturer Aalberts performed well. On the other hand, Wirecard weakened performance.

An investment in EssilorLuxottica was added as the managers believe it could benefit as opticians reopen post lockdown. Porsche is also gaining momentum on its push into electric cars and battery production. Investments in Carlsberg and Airbus were sold after performing well since the pandemic lows.

Investors should be aware that the fund invests in a concentrated fashion, which together with investing in smaller companies can increase risk. Charges are taken from capital which can increase income but reduces any capital returns.

Barings Europe Select Trust

The Barings Europe Select Trust fund returned 30.2%* over the past 12 months compared with the IA European Smaller Companies peer group return of 39.8%. While performance was strong, it failed to keep up with exuberant markets in the second half of 2020, which is in line with our expectations.

A focus on quality smaller companies helped performance in the early stages of the pandemic. However, investors should know that investing in smaller companies increases risk.

Investments in Dutch computer chip manufacturer ASML and Dutch lighting solutions company Signify (previously part of Philips) did well. Elisa, the Finnish Mobile and fixed network provider and German real estate platform Scout24 all underperformed.

In terms of new positions, Swedish medical technology company Getinge was added and has an exciting product portfolio. Dutch postal logistics company Post NL has a commanding position in the fast-growing Dutch parcel market.

The fund sold French costumer service solutions provider Teleperformance which had performed well. Scandinavian insurance company Tryg faced some emerging headwinds to its business so was also sold.

Legal & General European Index

The Legal & General European Index fund is also on the Wealth Shortlist. It aims to track the performance of the FTSE World Europe ex UK Index, which has done well this year.

Annual percentage growth
May 16 -
May 17
May 17 -
May 18
May 18 -
May 19
May 19 -
May 20
May 20 -
May 21
IA European Smaller Companies TR 34.1% 8.2% -7.8% 1.8% 40.0%
Barings Europe Select Trust 37.2% 6.1% -1.8% 3.6% 30.2%
IA Europe Excluding UK TR 33.1% 2.5% -3.3% 3.1% 27.3%
FTSE World Europe ex UK TR GBP 35.7% 0.9% 1.8% 1.9% 26.6%
Legal & General European Index 35.9% 0.8% 0.1% 2.8% 24.6%
Threadneedle European Select 31.4% 2.6% 3.1% 11.8% 22.4%
TM CRUX European Special Situations 33.9% 2.6% -5.2% 0.1% 21.0%

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/05/2021.

How have other European funds performed?

Over the past 12 months, funds with a focus on smaller companies have outperformed those funds which invest in larger companies. Investors have been willing to take more risk after the advent of effective vaccines.

More broadly the IA Europe ex UK sector returned 27.3% over the past year* – that was slightly higher than the wider market. It’s a similar story for the average fund in the IA European Smaller Companies sector. Again, past performance isn’t a guide to future returns though, and performance over one year is a short time period.

Source: *Lipper IM, to 31/05/2021.


MORE ON THREADNEEDLE EUROPEAN SELECT, INCLUDING CHARGES

THREADNEEDLE EUROPEAN SELECT KEY INVESTOR INFORMATION


MORE ON TM CRUX EUROPEAN SPECIAL SITUATIONS, INCLUDING CHARGES

TM CRUX EUROPEAN SPECIAL SITUATIONS KEY INVESTOR INFORMATION


MORE ON BARINGS EUROPE SELECT, INCLUDING CHARGES

BARINGS EUROPE SELECT KEY INVESTOR INFORMATION


MORE ON LEGAL & GENERAL EUROPEAN INDEX, INCLUDING CHARGES

LEGAL & GENERAL EUROPEAN INDEX KEY INVESTOR INFORMATION


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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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