o the soaring industrials areas for the winners, whilst the losers were trying to find that ever-so-elusive value in telecom shares. Finally, the winners appear to have been less concerned about quality, as most feature higher debt-to-capital ratios than poorer performing offerings.
Despite their strength, we have trouble getting too enthused about the sector leaders. They appear to be focused on areas of the market that are richly valued relative to historical norms. Their exposure to mid-caps also exposes them in part to the effects of the ongoing credit-crunch, as the M&A activity that has helped fuel the mid-cap boom is dependent on easy money. We’re certainly not calling the top for these funds, but we’d favour a more contrarian approach at this point.
For others, the pickings in the sector appear to be slim. The SWIP Pan-European funds (the plain vanilla one and the SRI version) have shown some spark under Nigel Bolton, and we’re pleased with the efforts the group has made to reform itself in recent years, but it’s a bit too early to give them a full recommendation. Although there is a tracker, Prudential European Index, it’s too expensive in our view. Those who wish to go the index route may be better off with an ETF such as iShares MSCI Europe, which charges a TER of 0.30%.
For those who disagree with our assessment of the risks posed by valuations among mid-caps and industrials, M&G Pan European is worth considering. Manager Giles Worthington has sharply improved performance here since taking the helm in September 2003 by taking advantage of a more flexible mandate to dip down the market-cap ladder and pursue growth in peripheral European markets such as Greece and Ireland. At 1.67%, the fund’s TER is reasonably attractive, and we think M&G has done a good job of rebuilding itself into a quality outfit.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
