Interactive Investor

Consistently great regional funds - Premier League 2014 annual review

13th November 2014 11:35

Rebecca Jones from interactive investor

Europe Excluding UK Sector: Blackrock Continental European Income

Managed by: Alice Gaskell and Andreas Zoellinger

At just over three years old, BlackRock Continental European Income has less of a track record than the previous Premier League Europe star Henderson European Focus, but it has made an impressive start.

Despite launching in May 2011, a tough period for European equities, the fund returned 35% from inception to 30 September 2014, compared to just 18% from the IMA Europe excluding UK sector.

It has also enjoyed phenomenal growth, particularly during 2013 when assets under management grew from just £60 million in January to £220 million by the end of the year.

Co-managers Alice Gaskell and Andreas Zoellinger now manage over £550 million of client money, and with a dividend yield in excess of 4%, interest in the fund shows no sign of waning despite disappointing GDP data from the eurozone this year.

On this point Zoellinger is sanguine, insisting prospects are strong on a company level, if not on a wider economic one.

"In general we remain quite positive on European equity markets on the back of strong multiple expansions. Earnings growth is projected at 8% over the next 12 months and we think dividend growth will be consistent with that," he says.

The managers claim that Europe boasts a number of companies with sustainable and fast-growing dividends, particularly within the infrastructure and insurance sectors where they have holdings in names such as Zurich Insurance and French utilities firm GDF Suez.

"Equity yields have always been much higher in the UK than Europe, but over the last 10 to 20 years that gap has narrowed significantly as managers focus on paying dividends. There is still a big opportunity here for investors," says Zoellinger.

North American Sector: Fidelity American Special Situations

Managed by: Angel Agudo

After a shaky few years following the financial crisis, the 34-year-old Fidelity American Special Situations fund seems to be back on top, outperforming both sector and benchmark since August 2011.

The £403 million investment vehicle has enjoyed particular success this year, returning 13.6% in the nine months to 30 September compared to 8% from the IMA North America sector and 10% from its benchmark, the S&P 500 index.

According to current manager Angel Agudo, this is largely due to the fund's exposure to healthcare stocks, which have benefited from an uplift in merger and acquisition activity this year.

"2014 started with the takeover of one of our conviction holdings, drug sales and marketing company Forest Laboratories; we also benefited from exposure to AstraZeneca, whose stock was boosted by the Pfizer offer," says Agudo.

Technology firms also occupy a significant portion of the portfolio. The manager prefers what he describes as "old-tech" software companies such as Microsoft and Oracle, where he believes that markets are "under-appreciating the potential of the existing business", particularly their large, installed client bases.

Agudo is less bullish on energy and resource stocks, with only 7% of the portfolio invested in the sector. He does, however, see the discovery of shale gas as "a game-changer" for the US that should help drive the economy forward.

"The US has become the engine of global growth once more. The shale gas revolution has ensured access to cheap energy, while population growth and immigration is providing a low-cost source of labour. This, combined with an institutional structure that supports entrepreneurship, innovation and a profit focus, is promoting growth," he says.

Japan Sector: Legg Mason Japan Equity

Managed by: Hideo Shiozumi

Legg Mason Japan Equity has enjoyed three years of stellar performance, returning over three times more than both the IMA Japan sector and MSCI Japan index during the period.

However, as one industry commentator puts it, Legg Mason Japan Equity is not a fund for "widows and orphans"; while the £263 million fund has enjoyed some recent consistency, it is highly volatile, often vacillating between 70% returns one year and 50% losses the next, as it did in 2005 and 2006.

Manager Hideo Shiozumi makes no apologies for this, explaining that volatility is the "price for higher long-term returns" from companies of the "new Japan" that are involved in the move away from a manufacturing to a service-oriented economy.

Shiozumi fervently avoids "old-fashioned Japanese manufacturing companies", the value of which he believes is being eroded by lower-cost competitors in emerging Asia. Instead, he focuses mainly on technology and healthcare, which he believes will be the main drivers of the economy in the long term.

Over the past three years key winners for the fund have included Nihon M&A, a mid-sized merger and acquisition specialist whose share price grew by over 60% in the 12 months to 31 August, and SMS, a nursing-home care provider that grew by more than 98% during the last year.

Shiozumi still has confidence in the government's reforms, despite a lacklustre year for markets. "The policies that prime minister Abe will encourage and promote lay the seeds for a healthier and stronger economy," he says.

Asia Pacific Excluding Japan Sector: Baillie Gifford Pacific

Managed by: Ewan Markson Brown and Roderick Snell

Baillie Gifford Pacific entered the Premier League in our May quarterly review and has held onto its place, thanks to some strong performance in the year to 31 August. More recently the fund has suffered from sell-offs in Asia and emerging markets, which caused it to shed 8% in September alone.

Despite this, co-manager Ewan Markson Brown remains positive on the outlook for the Asia Pacific region. While periods of volatility are likely, he believes that "deep-rooted" structural drivers should support Asian markets over the long term.

"Asia and emerging markets have been underperforming due to structural issues and knee-jerk reactions to politics. That is starting to turn around: in India we saw the election of Modi, while in China the government is clamping down on corruption and re-orienting the economy towards consumption," he says.

Regionally, the £260 million fund's largest exposure is to South Korea, which Markson Brown explains is due to the country's dominance over the Asian technology market, most notably through Samsung.

"Technological change is accelerating on a global basis, and because Asia and emerging markets have lower production costs it is far easier for them to adopt new technologies; the key one is mobile phone technology," he says.

Like Baillie Gifford's flagship investment trust Scottish Mortgage, the Pacific fund is heavily overweight in technology stocks, with more than 40% of the portfolio invested in the sector.

Alongside Samsung the firm also invests in Chinese internet giant Tencent, Taiwanese semiconductor manufacturer TSMC and Indian IT provider Tech Mahindra.

*To view our consistent Premier League stars, and for a snapshot of how they have performed over the past three years, click through using the links below.

Browse Money Observer's Nov 2014 Premier League review

Introduction

UK equity funds

Global equity funds

UK and global bond funds

Regional equity funds

Mixed assets funds