European smallers lead without large currency boost

European Smaller Companies was the best performing fund sector over the first half of 2017, and without a huge currency boost

July 6, 2017

by Leonora Walters

European Smaller Companies funds and investment trusts have led performance over the first half of 2017, and their good run looks set to continue. It follows recent numbers showing that this sector also did well over the 12 months following the UK's Brexit vote last year, and had a good month in May.

Between 1 January and 1 July Investment Association (IA) European Smaller Companies sector funds made an average return of 17.28 per cent.

Top 5 performing fund sectors 1/1/17 - 1/7/17

Sector	Return (%)
European Smaller Companies	17.28
China/Greater China	17.15
Asia Pacific ex Japan	14.3
UK Smaller Companies	14.02
Technology & Telcommunications	13.62

Source: Shore Financial Planning/FE

And the investment trust that enjoyed the highest share price rise was TR European Growth (TRG), up 38 per cent. Other Europe trusts among the top 15 risers were Montanaro European Smaller Companies (MTE), up 32 per cent, European Assets (EAT), up 30 per cent, JPM European Smaller Companies (JESC), up 29 per cent, Jupiter European Opportunities (JEO), up 27 per cent, and Henderson European Focus (HEFT), up 27 per cent.

"TR European Growth has had an impressive run and saw its discount to net asset value (NAV) tighten to 5 per cent from 15 per cent at the start of the year," commented analysts at broker Stifel.

And European Smaller Companies was the investment trust sector that experienced the largest discount tightening over the first half of this year, coming in from 13 per cent to 5 per cent. The Europe sector, which encompasses large and mid-cap trusts, re-rated from a 9 per cent to 3 per cent discount to NAV, according to Stifel.

Investment trusts with the largest share price rises over the first half (H1) of 2017

Trust	Price rise (%)
TR European Growth	38.3
Montanaro European Smaller Companies	32.3
3i Group	30.9
European Assets Trust	30.2
Vietnam Enterprise Investments	28.9
JPMorgan European Smaller Companies	28.7
India Capital Growth	27.7
Weiss Korea Opportunity	27.6
Pacific Horizon	27.6
JPMorgan Chinese	27.2
Jupiter European Opportunities	27.2
Henderson European Focus	27.1
Independent Investment Trust	25.8
Scottish Mortgage Investment Trust	25.2
BlackRock Smaller Companies	24.7

Source: Datastream/Stifel. Excludes fund with market capitalisations of less than £100m at 30/06/17, VCTs, splits and highly geared ordinary share structures. Excludes Property Companies and Litigation finance funds.

"Europe was back in vogue as valuations looked attractive on a relative basis and some political risk was taken off the table," explained analysts at Stifel.

And Ben Yearsley, director at Shore Financial Planning, said fundamentals are getting a lot better in Europe with, for example, unemployment rates improving. He added: "Good economic growth tends to filter through most quickly to smaller companies." This is because these tend to be more exposed to their domestic economies.

While no longer cheap, European equities still offer value relative to the US, according to Mr Yearsley.

"Europe has had a good run, but from a low base," he said. "And the trend of improving fundamentals is there. I don't think it's a case of six months and over. And against the euro, on the back of good economic growth and a better political climate, Sterling has weakened more than 2 per cent in the past six months. So while it has added a little it has not made a huge amount of difference."

But currency movements did have an affect on North American Smaller Companies funds, which were among the five sectors that did least well over the first six months of this year, with a return of only 0.91 per cent.

Bottom 5 performing fund sectors 1/1/17 - 1/7/17

Sector	Return (%)
Targeted Absolute Return	1.86
Global Bonds	1.64
North American Smaller Companies	0.91
UK Gilts	0.3
UK Index Linked Gilts	-0.73

Source: Shore Financial Planning/FE

And North American investment trusts were among those that had the largest share price falls over this period after a strong run in 2016. Jupiter US Smaller Companies (JUS) fell 8 per cent, BlackRock North American Income (BRNA) fell 7 per cent and JPMorgan US Smaller Companies (JUSC) fell 2 per cent. The North American Smaller Company sector average discount to NAV widened by 4 per cent over this period.

Investment trusts with the largest share price falls over H1 2017

Trust	Price fall (%)
Lindsell Train	18.5
Ranger Direct Lending	17.7
JPMorgan Russian Securities	14
BH Macro	10.2
Jupiter US Smaller Companies	8.3
Riverstone Energy	6.6
BlackRock North American Income	6.5
SQN Asset Finance	5.9
North American Income Trust	4.5
Majedie Investments	3
BH Global	2.6
JPMorgan US Smaller Companies	1.8
SQN Asset Finance C shares	1.5
Ground Rents Income	0.8
NB Global Floating Rate Income	0.3

This was largely due to Sterling rising more than 5 per cent against the US dollar over the first half. Maarten Freeriks, analyst at Stifel, added: "These trusts also fell due to investors questioning Donald Trump's ability to pass reforms, with the healthcare bill, for example, redrafted multiple times. And some investors switched from US to European equities as valuations appeared more attractive in Europe on a relative basis after political risk in the form of binary events such as Dutch and French elections was taken off the table."

But major markets did fairly well in local currency returns. "Many indices have reached or neared all-time highs during the past six months, despite evidence in some economies of slowing growth and lower confidence," said Mr Yearsley. "But currency movements are still having a large influence on markets and a major impact on your portfolio."

He said a good way to try to mitigate this is portfolio diversification.

Major market local currency returns 1/1/17 - 1/7/17