Multi-managers like Rob Burdett (pictured) are watchful of euro risks despite a positive market last year and the potential for further gains after central support for the periphery.
European equity markets had a good run in the second half of last year: the FTSE Europe ex-UK was up 16.8% over the year, whereas the FTSE World was up 7.2%. However, multi-managers remain on their guard at the start of 2013.
‘It wasn’t without its volatility, for example between mid-October and mid-November, when the market drag was led by Europe,’ he said. ‘So, yes, we are more optimistic, but not to the point of going overweight.’
Burdett said the index tended to beat active managers in the second half of 2012. He said European Central Bank (ECB) president Mario Draghi’s statement in July about doing ‘whatever it took to save the euro’ secured the future of several banks and they rallied. ‘It caught managers out, as they were underweight in that sector,’ he said.
Shorting the FTSE on trouble
Ahead of the Italian election in February and the German federal election in the autumn, Burdett and Potter are considering adding some protection to the portfolio in case of market ‘nerves’.
‘You need to be on guard permanently,’ said Burdett. ‘If you start to see nationalistic populist policies gaining significant momentum, that could be a risk for the euro. It’s very unlikely but the ultimate thing to watch for.’
He said this could be seen during the US election last November, when anti-Chinese rhetoric from the Republicans and talk of further austerity frightened markets.
The Thames River managers, who invest around 5% in European-focused funds, were also alert during the French elections last spring, when nationalist sentiment was rising.
‘We tend to sell the FTSE future short: a quick way of doing it without having to upset long-term strategic portfolios,’ he said.
The Distribution fund has returned 27.2% since 2008, compared to the LCI Mixed Asset benchmark, which rose 36.8% over the same period.
Citywire A-rated Paul Stevens (pictured above), manager of the £8.2 million Hurlingham Managed Growth fund, said he was one of the first to take advantage of cheap European valuations in December 2011. The fund has returned 9.0% over five years, compared with a rise of 3.3% in the LCI FTSE All-Share/WorldxUK/BrGvAllStk (50:30:20) benchmark over the same period.
‘We always felt the potential for a break-up in the euro was unlikely and there would be a strong will to hold it together,’ he said. ‘The break-up is just too horrifying to contemplate.’
‘They have a mid and small cap bias, as this is probably where the best returns can be seen and where they can adapt to changing markets,’ he said.
Buying at a discount
Toby Ricketts (pictured below), chief executive of Margetts Fund Management, which manages a range of multi-manager vehicles with assets totalling more than £300 million, invests up to 24% in Europe depending on the fund.
He said the outlook continued to be positive, despite a weaker flow of statements from the ECB.
‘It’s more about what isn’t being said. Germany was against any write down of debt from the ECB in 2011 but its objection has faded,’ he said. ‘Also, they have to accept more austerity in the US and that could be beneficial for European equities.’
Ricketts pointed to a ‘huge discount’ between Europe and other international markets. He said price-earnings (PE) ratios were cheaper in European markets compared with those in the US.
‘PE ratios at the moment in the US are about 16 and on the same measure in Europe about 13, so for similar businesses you’re getting much better value on the share price because of the pessimism in the market,’ he said.
Ricketts said if he was going to make a pure European play, he would head more down the small and mid-cap route.
He invests through funds such as Jupiter European Special Situations, Aberdeen European Equity and the more concentrated and aggressive Schroder European Alpha Plus funds. Margetts Providence Strategy has shot ahead of the LCI UK Balanced and International Equity (50:20:30), delivering 23.5% compared with the 13.2% of that benchmark.
‘We added European exposure around six months ago,’ he said. ‘It was a rare exception in that it worked straight away.’
There was a short-term opportunity for prices to fall further, he added. ‘Although there are still dark days ahead, the darkest days have passed. Now there’s a commitment to supporting the periphery when needed and there is a staggered recovery.’