Europe is a perennial underperformer. The region has yet to really gather any real momentum since the financial crisis of 2007-08. A debt crisis throughout the Eurozone’s periphery hit from 2010 and stifled any recovery, while more recently Brexit and trade have combined to depress returns for European investors.
In the 10 years to 21 March, the MSCI Europe Index has produced returns of 165% in sterling terms. That compares with the US-focused Russell 3000 at almost 400% and the broader index of developed countries, the MSCI World’s 265%.
As a result, investors have gone through long periods of shunning funds focused on European stocks. In the year to February 28, for instance, investors withdrew a net £3.3 billion from funds in the Investment Association Europe excluding UK sector, Morningstar Direct data shows. Investors in Europe-focused ETFs have been selling, too.
But there are a number of well-regarded investors plying their trade on the Continent. Morningstar analysts positively rate 19 funds in the aforementioned sector and three offerings in the Association of Investment Companies’ Europe sector.
Of these 22 mandates, three are run by Jupiter’s Alexander Darwall. All three, Jupiter European, Jupiter European Growth and Jupiter European Opportunities (JEO), hold Gold ratings.
Darwall has been with Jupiter since 1995 and has run Jupiter European since February 2001, so he has seen multiple investment cycles. In that time, the fund has produced returns for unitholders of 473%. That compares with just 138% from the Bronze-rated L&G European Index tracker fund.
Even more impressively, Jupiter European Opportunities has returned 675% in that time, although that investment trust has a number of benefits to enhance performance that the open-end structure does not.
Much of that performance has come over the past decade, with Jupiter European gaining 339% in that time compared with the L&G tracker’s 170%. Again, Jupiter European Opportunities outperformed both, returning 656%.
Downside Protection
While the closed-end fund tends to gain much more on the upside, Darwall’s open-ended mandate offers a bit more protection on the downside. This was evidenced during the financial crisis.
The L&G index fund was down 43.5% between October 2007 and March 2009. Jupiter European Opportunities lost more, at 56.3%, but Jupiter European held up better, losing 32.5%.
Over shorter-term timeframes, meanwhile, Jupiter European has outperformed. In the past five years, it’s returned 80% compared with JEO’s 68% and L&G’s 42%. Over three years, the figures are 48%, 40% and 36% respectively.
In the past year, again Jupiter European comes out on top at 6.32% compared with 1.86% for the other two funds.
Since the start of the fourth quarter of 2018, though, the tracker fund has come out on top over Darwall, losing 3.2% compared with Jupiter European’s 8.66% and JEO’s 15%.
Darwall’s big weighting in German payments specialist Wirecard (WDI) has hit performance, with the stock almost halving since October amid fraud allegations. The stock accounted for 7.7% of the open-ended fund as at 28 February and 16% of the closed-end vehicle as at 31 January.
The Morningstar Analyst View
All three of Darwall’s funds are managed using the same approach, look for the same types of companies and have a high level of commonality, says Morningstar analyst Samuel Meakin.
He adds: “The stability and consistency of management and investment approach are undoubted contributing factors to the funds’ success. The strategy is unconstrained, to allow the manager to find the best opportunities across the continent.
“Darwall takes a high-conviction approach; he builds his portfolios from the bottom up, following thorough fundamental analysis, and there is a strong focus in his process on having an in-depth understanding of how a company works and on maintaining regular contact directly with its management.
“He aims to invest in companies that can sustain profit growth and margins over a long period. To this end, he looks for companies with a good track record of profitability, proven product and business model, evidence of entrepreneurial endeavour, and the prospect of above-average growth opportunities.
“There is no set time horizon when buying a stock, and Darwall is happy to continue to hold on to successful investments as long as the strong business and management fundamentals remain in place. As such, portfolio turnover is generally low, helping to keep trading costs down.”
