Hold or Fold: F&C European vs Henderson European Capital Growth

European Central Bank rates rose recently. The move was anticipated but it remains an important factor for fund managers with continental European portfolios to run. This week our panel scrutinises two funds in this increasingly upbeat arena.

F&C European

What New Model Adviser® says:

The fund (F&C European 1 Acc) is run by F&C Investments and aims to provide medium to long-term capital growth through investment primarily in European equities. The focus is on larger companies, though smaller companies and smaller markets will often be included. The benchmark is the FTSE World Europe ex UK index.

What F&C says:

‘Prior to the announced takeover by Barclays, we bought ABN Amro as it had under-performed and we felt the company’s potential was not reflected in the valuation,’ says the fund’s manager Davina Curling.

‘We also purchased Adidas, which we felt had under-performed and offered good turnaround potential from the Reebok brand. Other purchases included construction conglomerate Saint Gobain, which looked set to benefit from a prospective change of focus towards value creation by disposing of underperforming assets. Overall, we reduced our weighting towards investment banking, as mergers and acquisitions have slowed and a significant part of the performance last year was driven by large non-repeatable trading.’

What the advisers say:

Gavin Haynes, Managing director, Whitechurch Securities

I would not look to invest in this fund due to its low tracking error and its underperformance of the benchmark by a couple of percentage points each 12-month period for the past five years. The fund is designed as a core holding for Europe but is middle of the road in most aspects in a highly competitive sector. Europe remains an under researched market and I am looking for stock-picking funds that have a higher conviction and will take greater relative risk to generate alpha while controlling absolute risk. However, I do rate Davina Curling and her team and would say investors should consider a switch to her European Dynamic fund. This is a smaller fund with a more flexible mandate utilising a more focused portfolio. Fold.

John Monaghan, Investment manager, Origen

On an absolute basis performance of the fund has been strong, reflecting the recent buoyant European market. This does, however, gloss over the somewhat mediocre relative performance versus the FTSE Europe ex UK index and peer group over the medium term. Over three and five years to the end of May 2007, the fund ranks in the third quartile lagging the index by 7.5% and 8.6% respectively. Over the short term, performance has been slightly more favourable with the fund performing in line to just above the index and peer group average. The portfolio is fairly concentrated and stocks are selected using F&C’s pan-European analyst team.

The fund typically has a larger cap bias which may explain some of the under-performance versus its mid-cap holding peers. Davina Curling also manages a European Dynamic fund, F&C’s other retail European offering, and this allows greater flexibility with market cap weightings and as such has outperformed this less aggressive version. Given the variety of funds in the sector we would advise our clients to use an alternative fund. Fold.

Steve Buttercase, Independent financial adviser, M2Financial

This fund has focused predominantly on companies and by default has got decent exposure to both Germany and France. I think this is a good play. Germany under Merkel is winning ground throughout Europe and Sarkozy’s France promises similar strides. The possible downside to F&C is that the fund is a bit safe and leading to performance which is slightly behind the benchmark. While the portfolio features excellent stocks which may outperform their national peers I think there is better potential elsewhere. Fold.

Henderson European Capital Growth

What New Model Adviser® says:

The fund (Henderson European Capital Growth A Acc) is run by Henderson Global Investors and seeks capital growth by investing in European companies, excluding the UK. The benchmark is the FTSE World Europe ex UK index.

What Henderson says:

‘One of our best performers during April was Puma after it was bid for by retail and luxury goods company, PPR. The fund also did well from a large holding in Commerzbank which is seen as a likely takeover candidate,’ says Henderson Global Investors. ‘We added a new holding in media conglomerate and publisher, Prisa, funding it with a sale of Novartis. We also topped up a couple of key positions such as offshore drilling contractor Seadrill, which has completed its takeover of Eastern Drilling, and software company SAP after it released good results. European growth is accelerating and the region’s stock markets seem able to shrug off bad news generated elsewhere in the world. We see this as a positive sign and expect the fund to make further progress throughout 2007.’

What the advisers say:

Gavin Haynes, Managing director, Whitechurch Securities

This is a good example of a potential turnaround fund. Although performance in recent years has been disappointing, the last 12 months has seen a new manager brought in and a change in the investment philosophy. Paul Casson was recruited last year from Scottish Value Management where he had built up a track record of top-quartile performance over three years managing that company’s Continental Europe fund. Since taking over in July last year he has changed the fund to a much more focused bottom-up driven portfolio, with a greater tracking error. The fund will also now include a larger proportion of mid and small caps where the manager believes he can add value. Casson follows a clearly defined approach with a contrarian bias to seek out themes and stock ideas. Given the change in philosophy and manager track record we would say he should be given the chance to turn this around. Hold.

John Monaghan, Investment manager, Origen

Once again, fund performance has been very good on an absolute basis but in relative terms is nothing out of the ordinary. Over three and five years to the end of May, the fund ranks in the third quartile lagging the FTSE Europe ex UK index by 9.2% and 11.8% respectively and the peer group average by 6.8% and 6.3%.

However, since the new manager took the helm in July 2006 the fund has delivered 26.6% – identical performance to that of the peer group average. The fund is relatively concentrated holding 40-75 names, with stocks being selected by the manager off the back of Henderson’s pan-European analyst bank. The fund has no set geographical limits except at the sector level which allows the manager to effectively halve or double weightings as he sees fit. However, given the other funds in the sector I would advise clients to use an alternative. Fold.

Steve Buttercase, Independent financial adviser, M2Financial

This portfolio has much more exposure in Germany. I have faith in the German economy over five years and I expect it to perform along with sections of the emerging Eastern European states. Therefore, any fund with over a quarter of the portfolio exposed to Germany should do well, although again the track record is very pedestrian and the fund commentary somewhat ponderous. There is more excitement elsewhere but on balance a narrow hold.

New Model Adviser’s® verdict

F&C European

The panellists cannot fault the fund’s absolute performance and have plenty of time for the manager Davina Curling. But they much prefer the other European portfolio that she runs and, unfortunately, are far less sold on this one. Fold.

Henderson European Capital Growth

The panellists did not exactly go overboard in their enthusiasm for this fund. But a change in philosophy and a high weighting to Germany meant the portfolio gained two votes out of three. Hold.

Twist

The sector is one which exhibits plenty of variety and quality and one fund which ticks the boxes in those regards is Odey’s Continental European fund (Odey Continental European Acc) .