Are European woes bringing investment opportunity?

This presents an ideal situation for European special situations funds, as the term carries connotations of looking beyond the usual suspects and being willing to invest in companies undergoing a turnaround or some other change that the market has failed to value properly.

As a result these types of funds usually perform well in a market boom and recovery, but badly when the market troughs.

It is no surprise that in the 12 months to January 30 2009, which includes the Lehman Brothers crash of September 2008, European special situations and recovery funds made an average loss of 25.1 per cent.

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However, in the 12-month period following that, to January 30 2010, they bounced back making an average gain of 27.7 per cent, according to Morningstar.

It may therefore be coincidental, or intentional that half of the four European special situations or, recovery vehicles were launched in late 2008 and early 2009, in the recuperation period. These were the Henderson European Special Situations and the Scottish Widows European Special Situations funds.

In the period since the newest fund in the sector, the Henderson European Special Situations, launched on October 1 2009, to February 3 2012, it has outperformed its peers – producing a cumulative return of 17.73 per cent, compared with the Jupiter European Special Situations, the Scottish Widows European Special Situations and the JP Morgan European Recovery funds, which have posted a 5 per cent gain and losses of 4.9 per cent and 5.07 per cent respectively, according to FE Analytics.

However, the crisis of 2008 is far different to the one in Europe today. The one in 2008 was purely a banking crisis, whereas current developments intertwine banks and sovereign debt, meaning that the next recovery could adopt a different shape and take longer to achieve.

So far, in the year to January 30 2012, all of the four funds that are categorised European Special Situations vehicles by Morningstar made an average loss of more than 10 per cent.

Chris Clarke, manager of the £314.4m Scottish Widows (HIFML) European Special Situations fund, admits that the past few months have been full of twists and turns. Even Germany, the eurozone’s largest and strongest economy, has experienced occasional wobbles. Its auction of 10-year bunds on November 23 was the worst German bond sale since the euro’s inception.

Following the news, the fund, which has a 16.5 per cent weighting in the region, suffered, with its returns dropping by 2 percentage points overnight, reaching a three-month low of a 6.56 per cent loss on November 25 2011.

Prior to the August stockmarket crash, the fund was having a good year, but a drop in sentiment caused its returns to nose-dive on August 1 2011, and as a result, in the year to February 3 2012, it has made a cumulative loss of 8 per cent.

According to Julian Fosh and Anthony Cross, managers at Liontrust, the key to avoiding this type of problem is diversifying portfolios and having exposure to European companies that export to other parts of the world where growth remains.

Mr Fosh says: “It’s an interesting feature how well European companies have held up. We’ve generally done quite well in Europe. Nothing has fallen off a cliff – maybe some companies have been a little bit softer, but generally it’s been fine. Most areas have been quite strong. This is because quite a lot of our companies are selling into Europe, but then Europe itself is selling internationally.”