Heavy German equities focus pays off for European mutual funds

Significant exposure to Germany has paid off for equity fund managers since the global financial crisis began in mid-2007, as their portfolios’ long-term returns comfortably beat both European shares and the average European equities fund.

Research on the sector by data providers FE showed five funds with at least 25% of their assets in German equities have made up to 21.99% (Threadneedle European Select) since August 2007.

The gating of some credit funds that month by a French bank marked the start of the global crisis.

Four other funds FE highlighted made between -8.82% (Fidelity European Opportunities) and 9.66% (GAM Star Continental European Equity), over the period.

All compared favourably with the 8.96% average loss from IMA Europe ex-UK funds.

The Baring German Growth portfolio, the only fund in the UK IMA universe focused entirely on Germany, made 9.12% over the last five years.

Over three years, four of the five funds in FE’s examination beat the IMA Europe ex UK sector’s 13.4% returns, by at least 8%. Only Fidelity European Opportunities, with 10.9% over three years, fell short of its European peers.

Threadneedle showed the best performance over three years, with returns of 49.18%.

The other fund FE highlighted was the IM Argonaut European Alpha.

German equities as a whole are doing better than the rest of Europe, despite the debt crisis unfolding around them.

Since the Lehman crash, MSCI Germany is down 0.64%, compared to a 9.47% fall from the MSCI Europe ex UK index.

Rob Smith, portfolio manager of the Baring fund, said German companies are well placed to weather the recent climate of restricted credit, as opposed to their European rivals that relied on borrowing to boost earnings before the 2008/2009 crisis.

He points to German car makers such as Volkswagen, Porsche, Mercedes and Audi, “able to push out double digit sales growth, while the French rival Peugeot and Renault, and Fiat, just collapsed”. German car makers such as Volkswagen, Daimler Chrysler and BMW are among the fund’s top 10 holdings.

His portfolio also offers exposure to other global German brands, such as Bayer. Over the past year he has expanded his Baring German Growth Trust down the market capitalisation spectrum and focused more heavily on very large companies.

Smith said it was hard to take “meaningful active positions” in Germany’s largest stocks, not least if fund rules capped single name exposure at 10% of assets.

His portfolio holds the top five-crown rating from FE Analytics. The ratings are based on historical performance relative to an appropriate, targeted benchmark, chosen by FE.

Investing in equities is a long-term game, especially in the current volatile environment. Smith said German companies are at an advantage in that sense, since they are not afraid of taking a long-term approach to business expansion.

He said: “They do not tend to worry about having a flat or negative year in earnings if they are doing a lot of investment for the long term. If you are always just looking to the next quarterly set of numbers, in many cases the corporates can end up being a bit disappointing.”

Performance of funds and sectors   
Name3yrs (%)5yrs (%)10yrs (%)
Fidelity European Opportunities10.85-8.82132.89
GAM Star Continental European Equity21.519.66127.2
IM Argonaut European Alpha21.775.92N/A
Threadneedle European Select49.1821.99155.12
Baring German Growth28.539.12168.58
IMA UK All Companies35.673.0498.42
IMA Europe ex UK13.41-8.9696.98
Source: FE Analytics   

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