Introduction
The Investment Association (IA) European Smaller Companies sector saw net retail sales outflows in the last four months of 2014, peaking at £288m of outflows in October last year. However, by July this year net retail sales had recovered, with the sector seeing £148m in inflows. But a torrid month for global markets in August once again deterred investors and prompted outflows of £34m from European small-cap funds.
A search for the funds that populate the IA European Smaller Companies sector shows its 20 vehicles have delivered decent, even strong, returns however. Andrew Paisley’s Standard Life Investments European Smaller Companies fund tops its peer group over three years to November 13 2015, generating an impressive 76.5 per cent return, versus the sector average of 52.9 per cent over the same period.
In the past 12 months to November 13, the JPM Europe Smaller Companies fund leads the sector with a return of 24.5 per cent, compared to the 14.3 per cent average return from the peer group.
Azad Zangana, senior European economist at Schroders, points out there was a softening in aggregate real GDP growth in the eurozone in the third quarter, primarily due to a slump in manufacturing and wider industrial production.
“Within the member states, Germany disappointed with growth also slowing from 0.4 per cent to 0.3 per cent quarter on quarter.
“The slowdown in investment may be related to uncertainty caused by concerns over the state of the Chinese economy. Exports from Germany to China have certainly been slowing, but exports to the US and UK have more than made up for the shortfall.”
Yet Spain posted strong growth of 0.8 per cent, while France went from a flat second quarter to record 0.3 per cent GDP growth in the third quarter.
Mr Zangana is quick to point out that while the latest data suggests a slowdown in European activity, the region’s recovery remains “robust and stable”.
Phil Webster, who co-manages the Aberdeen European Smaller Companies Equity fund, adds: “I think it feels like smaller companies are better placed because they have a natural space to grow into, and I think those that are particularly well funded and have strong balance sheets can continue to invest to drive new products through these sorts of cycles.”
He believes there is some good value to be found in the small-cap space.
Mr Webster also notes there is less single-country risk among small-cap stocks compared to their large-cap counterparts.
“It’s really focusing on the fundamentals of good companies and being aware of where their exposures are,” he says. “You don’t have quite the same Asian exposure in some of these names, which you certainly would in some of the large-cap companies that are heavily exposed to China and some of the emerging markets.”
THE PICKS
Standard Life Investments European Smaller Companies
This €258m (£181m) fund, launched in 2007, is run by Andrew Paisley and invests in firms listed on European stockmarkets, including the UK. According to FE Analytics, the fund generated 21.9 per cent in the past 12 months to November 13, compared to the 14.3 per cent sector average return. The UK, at 28 per cent, is its largest country weighting, while there is a 22.3 per cent allocation to Germany and 13.4 per cent in France. Its portfolio has 35.6 per cent allocated to the industrials sector, followed by consumer discretionary at 22.5 per cent.
F&C European Small Cap
Sam Cosh is at the helm of this offering from BMO Global Asset Management. Launched in January 2005, this €527m (£370m) vehicle has delivered an impressive 144.5 per cent return in the 10 years to November 13, versus the 116.6 per cent average generated by its peer group, the FO Equity Small Cap Europe sector, FE Analytics shows. The portfolio’s largest country exposure is to the UK at 31.2 per cent, while Ireland accounts for 14.1 per cent. The manager favours the financials and industrials spaces, with 28.9 per cent and 28.2 per cent in these sectors, respectively.
EDITOR’S PICK
JPM Europe Smaller Companies
Co-managed by Francesco Conte and Jim Campbell, this £109m fund has established a strong track record since launching in February 1990. Its September update notes: “European small cap held up better than their large-cap peers in the third quarter amid worries over emerging market growth.” Its biggest allocation is to France, at 27.6 per cent, while 13.2 per cent is exposed to Germany. The managers favour the industrials sector, which comprises 29 per cent of the portfolio. FE Analytics shows the fund generated a return of 125 per cent in the 10 years to November 13.
