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Citywire Discovery: the minority adding European small-cap value

Data from Citywire Discovery reveal the very few managers adding value in the European small and mid-cap space.

Not many managers have been able to add value over both 10 and three-year periods in the European small and mid-cap equity sector.

In fact, just three have: Citywire A-rated Nicholas Williams at Barings, + rated Peter Fruzzetti (pictured) at MFS, and A-rated Philip Best at Argos. The trio all have positive manager information ratios over both long and medium-term timeframes.

That makes them a distinct minority in the peer group of 24 funds with track records stretching back to 2004. Nine have generated negative risk-adjusted performances through both periods.

Only two managers – Invesco’s A-rated Adrian Bignell and + rated Andrew Brough at Schroders – have successfully turned negative 10-year information ratios into positive territory on a three-year view.

In contrast, nine managers have let positive 10-year information ratios slide into negative numbers.

What has been going wrong?

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That around half of the veteran managers in this sector have outperformed on a risk-adjusted basis through the past decade is not overly surprising. That only four have done so since 2011 indicates the difficulty of keeping pace with the indiscriminate rally of the past three years.

The start of the period brought a savage selloff amid fears of a Eurozone breakup: the MSCI Europe Small Cap index crashed by 19.8% in 2011, compared with a milder decline of 8.7% from the MSCI World Small Cap index. In that year, only one manager – Argos’s Best – posted a positive total return, of 0.8%.

But in each of the two subsequent years, the European small-cap index smashed the global one: by 29.5% to 18.1% in 2012, and by 40% to 32.9% last year. Europe lagged in the first half of this year, but only by 5.8% to 6.5%.

So staying ahead of that surge has proved a challenge to which only the minority have been equal. Andrew Brough (pictured), for example, has done so by overweighting the UK and industrials. Peter Fruzzetti has achieved it through an even greater allocation to the UK – half his portfolio, compared with Brough’s 28% – but half the index’s and Brough’s 20% weighting to financial services.

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A related point is that this sector contains funds with mandates both including and excluding the UK, although there is no strong correlation between this and their performance.

Among the 24 funds with 10-year records, only five eschew the UK. Two of these – JPM Europe Smaller Companies and Lombard Odier Eurozone Small & Mid Caps – have negative information ratios over both 10 and three years.

Two more have split performances: Invesco Perpetual European Smaller Companies is negative over 10 years but positive over three, while : Schroder European Small & Mid Cap Value has it the other way around.

The last ex-UK fund, Baring Europe Select Trust, is positive over both timeframes – as well as being the absolute best for the decade, and third best over three years.

The analysis comes from Citywire Discovery, a new desktop system that allows fund buyers and fund groups to access track records of over 9,000 managers tracked by Citywire. It provides unique insights into peer group analysis, performance comparisons and competitor analysis. For more details contact support@citywireinsight.com

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Nicholas Williams, Barings

Citywire A-rated Nicholas Williams runs one of the largest funds – the £1.2 billion Baring Europe Select Trust – in this subset of veterans. However, that equates to just a 2% market share despite not only Williams’s longevity but performance through the decade.

His information ratio is 0.37 for the 10-year period and 0.25 over three years, both comfortably ahead of the peer-group averages of 0.01 and minus 0.14 respectively.

Williams cannot be accused of playing it safe either. His largest country allocation is to France, at 16.9%, while many competitors have populated their portfolios with Scandinavian small-caps or more familiar British mid-caps (Baring Europe Select’s mandate excludes the UK).

Furthermore, his greatest sector weighting is to financials – and not just insurers. His third largest position is French asset manager Eurazeo, followed by the Spanish provider of trading systems Bolsas y Mercados Españoles.

Three-year total return: 50% (Average Manager Total Return: 37.3%)

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Philip Dicken, Threadneedle

The largest fund in this peer group is managed by Philip Dicken, whose by Pan European Smaller Companies strategy contains £1.5 billion.

Over the full 10-year period Dicken is second only to Williams in risk-adjusted terms, with an information ratio of 0.33. However, on a three-year view Dicken has slipped into negative territory, albeit only on minus 0.01 – meaning he would still have beaten trackers after costs.

The relative weakness has been predominantly incurred over the past year, when his fund has gained just 10.6% to the index’s 23.9%.

At the country level Dicken is most overweight the UK, followed by France and Ireland, while being underweight Sweden, Switzerland and Italy. By sector he is backing healthcare and basic materials, but is allocating nothing to either telecoms or utilities. His top position is Danish jeweller Pandora.

Three-year total return: 46.1% (Average Manager Total Return: 37.3%)

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Adrian Bignell, Invesco

Invesco’s A-rated Adrian Bignell has endured a tough decade, but has turned that around with a strong run since 2011.

Bignell’s 10-year information ratio is one of the sector’s worst, at minus 0.15 compared with an average of 0.01. On a three-year view, however, he ranks second in the peer group with 0.3 while his average rival has subtracted value.

His fund is nonetheless still relatively small at £185 million, even though it has been around since 1984 and is one of the few in the sector that will not overlap with UK equity portfolios.

Bignell’s top holding, representing 5.4% of the fund, is an unusual one: Leonteq, a Swiss specialist in structured investment products. Its share price has nonetheless more than trebled over the past year, and it is also a favoured pick of Jupiter’s A-rated Alexander Darwall.

Three-year total return: 53.9% (Average Manager Total Return: 37.3%)

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Colin Stone, Fidelity

Colin Stone is best known for his work on the £423 million large-cap Fidelity European Opportunities fund, which has returned 1,321% since inception in 1988 compared with the index’s 929%.

However, performance has been more subdued recently and the fund lags the index with a return of 12.1% to its 16.5% over the past three years.

So Fidelity recently refreshed its management, with Citywire A-rated Alberto Chiandetti to take the reins in October.

Paras Anand, head of European equities at Fidelity, explained that this would allow Stone to concentrate on his small-cap strategy.

This launched in 1995 and now contains £872 million, but it too has lagged its benchmark. Stone’s information ratio on the fund is negative for both 10 and three-year periods, at minus 0.1 and minus 0.24 respectively. For that to reverse, Stone will need his significant overweights to information technology and to the UK to pay off.

Three-year total return: 35% (Average Manager Total Return: 37.3%)

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