Top Rated Funds Outperforming their Peers
SPDR S&P Euro Dividend Aristocrats ETF
Morningstar Analyst Rating of Bronze
The fund’s underlying index seeks to build a portfolio of the 40 highest-yielding eurozone companies that have maintained or increased their dividend payments for at least 10 years. The index’s straightforward approach to selecting dividend stocks and the fund's low fee of 0.30% have proved very effective for the past 10 years, and 2016 was no exception.
Year to date, the fund has comfortably outperformed both the MSCI EMU Index and the eurozone large-cap Morningstar Category average. Stock selection within financials, especially the exclusion of periphery banks, has been the most evident source of relative outperformance, followed by utilities and healthcare. Our equity factor analysis shows that the portfolio has above-average quality characteristics, which we accredit to the strict screening methodology.
Schroder ISF European Special Situations
Morningstar Analyst Rating of Silver
The approach used here is predominantly bottom-up, and fund managers Leon Howard-Spink and Paul Griffin seek strong franchises with pricing power and structural growth drivers. The fund has achieved top-decile performance year to date, outperforming both the MSCI Europe Index and the Europe large-cap growth equity category average by comfortable margins.
The underweight position in financials was positive for relative returns as the sector was hit hard in the first half of the year because of concerns over slower growth. The fund’s stock selection within the sector also contributed to performance, including names such as Aurelius and SFS Group. Additionally, stock selection in technology, industrials, and healthcare helped relative returns.
Morningstar Analyst Rating of Bronze
Oliver Kelton targets companies undergoing material change. He uses long-established contacts with local research houses across Europe to aid his research and gain an awareness of local trends. He uses cash tactically and is prepared to hold elevated levels when he has negative views on equities. Indeed, the manager has executed his process skilfully and consistently across different market environments.
Having said that, investors should note that the fund’s unconstrained mandate and focused portfolio can lead to returns that swing wildly. After a challenging 2015, the fund’s fortunes turned in 2016 and performance returned to good form, positioning it ahead of most its peers. The fund’s significant underweighting in financials and good stock selection in the sector as well as excellent stock selection in telecoms, where the fund holds a notable overweighting, were key drivers of returns. The fund’s elevated cash position at 15% of assets was also beneficial to performance.
Morningstar Analyst Rating of Gold
Volatile market conditions are usually this fund’s forte. The relative performance of the fund in 2016’s choppy market condition has been, unsurprisingly, very strong, with a loss limited to 2% compared with a 5% decline for the Europe large-cap category average. Risk management is central in this rigorous investment strategy. Portfolio construction is based on quantitative optimisation techniques designed to produce a diversified portfolio with the lowest possible volatility. The behaviour of the fund is very consistent with the strategy.
It has been structurally less volatile than the index and its peers and tends to better protect capital during market corrections as showed by its resistance in 2008 and during the 2011 eurozone debt crisis. The qualitative intervention of managers is also essential for the successful implementation of the strategy. The team includes six managers and seven analysts under the direction of Alexei Jourovski. The long-term risk-adjusted performance is excellent. The fund comfortably outperformed its competitors over three, five, and 10 years to the end of October 2016 with less risk.
Morningstar Analyst Rating of Silver
Manager Martin Skanberg typically looks for companies with sustainable, profitable growth above market expectations or improving long-term returns. The fund has no particular style bias; the manager is flexible and will at times tilt the portfolio to reflect the areas where he sees the most opportunities.
The fund has outperformed the FTSE World Europe ex-UK Index and the Europe ex-UK large-cap equity category average in 2016 to date. The overweight position and stock selection within basic materials have been beneficial for relative returns, with strong performance from holdings such as Sika and Koninklijke DSM. The underweight position in financials also helped as the sector struggled, but this effect was mitigated by negative stock selection within the sector.
Which Top Rated Funds are Failing to Deliver?
Morningstar Analyst Rating of Bronze
The fund’s underperformance in 2016 so far constitutes a reversal of last year, when the fund significantly outperformed the MSCI Europe ex-UK Index and finished in the top decile of the Europe ex-UK large-cap blend equity category. Alongside bottom-up stock-picking, Barry Norris' macro views are an important input into the fund’s positioning, and he does not shy away from taking large sector and country bets.
The bulk of this year’s underperformance came following the result of the UK’s referendum on European Union membership, which led to a significant drawdown as the fund had a procyclical bias, partly based on the manager’s belief that the UK would not vote to leave the EU. Subsequently, the manager quickly positioned the fund more cautiously as he feels the result will cause growth to decelerate in Europe, and he therefore missed some of the rebound in the performance of more-cyclical assets. The EU referendum demonstrated that macro calls are difficult to get right all of the time; however, we feel that the manager has demonstrated his ability to navigate markets well over the longer term.
Morningstar Analyst Rating of Gold
This fund has many of the features we like to see: a talented long-standing manager who is part of a highly experienced European equities team, a diligent investment process that has been proved through time, and a consistency of approach on which investors can rely. The manager likes companies with proven track records and clear business plans and where management teams have demonstrated evidence of entrepreneurial endeavour and good stewardship. This approach yields an intrepid portfolio that is characterised by large stock, sector, and country bets, given its unconstrained nature.
The manager's growth tilt also adds price risk to the equation, which is compounded by the concentrated portfolio of around 35 stocks. Those risks were on display in 2016 as the fund’s holdings in industrials and healthcare were derated; Novo Nordisk and Ingenico were down in double digits. That said, the manager’s experience investing through different market conditions gives him the confidence and skill set one needs to run this type of strategy well over the long term.
Morningstar Analyst Rating of Silver
The managers here have a flexible approach to investing and look for companies with attractive medium to long-term earnings power as well as restructuring and turnaround situations. However, they do this whilst taking into account the current prevailing macroeconomic environment, and they will use this to assess any unintended risks in the portfolio. 2016 has proved to be the toughest year in terms of performance thus far over Nigel Bolton’s eight-year tenure here.
Despite the fund’s underweighting in financials, stock selection in the sector has hurt performance, particularly holdings in Bank of Ireland, Intesa Sanpaolo, Lloyds, and Hargreaves Lansdown. Stock selection within IT and an underweighting in materials was a further drag on performance. One bad year does not dent our confidence in this offering.
The concentrated portfolio and high-conviction approach mean that investors should expect significant gyrations in performance, for better and for worse.
