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FSM Fund Choice: AmSchroder European Equity Alpha [October 2017] September 29, 2017
In this month’s Fund Choice, we will look into the European market, highlighting one of the European funds that investors can consider in order to tap into the investment opportunities within the region – AmSchroder European Equity Alpha
Author : Jerry Lee Chee Yeong


FSM Fund Choice: AmSchroder European Equity Alpha [October 2017]

Early this year, many investors might have shied away from the European equity markets due to the fear of economic slowdown in the continent and also the escalating political uncertainty (the heavy political calendar in European Union). We also observed that some of the global fund managers employed a defensive strategy for their exposure in the European market at the beginning of this year. However, the European market turned out to surprise investors with better-than-expected economic data and the European equity market as represented by Stoxx 600 index registered a decent year-to-date return of more than 15% in Ringgit term, as of 22nd September 2017. As such, we believe that investors should not be too pessimistic about the impact of Brexit and we believe given the improving global economic outlook, the European market is likely to be one of the beneficiaries. Hence, in this month’s Fund Choice, we will focus on the European market, highlighting one of the European funds that investors can consider in order to tap into this investment opportunity – AmSchroder European Equity Alpha.

Robust Economic Growth

In line with the market expectations, the Eurozone economy continues to register robust growth of 0.6% q-o-q in 2Q2017. The European economy posted a broad-based expansion with household consumption, government expenditure, exports and private investment accelerating by 0.5%, 0.5%, 1.1% and 0.9% q-o-q respectively. Improving consumer confidence as well as consumer demands were the drivers for the consumption and investment growth in the second quarter. However, the exports sector was hit by the strong Euro, with q-o-q growth slowing down to 1.1% from 1.3% in the previous quarter.

Looking at the data for the individual economies, Netherlands and Spain delivered strong economic growth in the second quarter while the economic growth was stable in France and Italy. Although we notice a moderation in the largest economy within the Eurozone – Germany, the growth in the second quarter was still decent at 0.6% q-o-q. Over the same period of time, household consumption in Germany showed healthy improvement due to the strong labor market which led to decent wages growth and boosted consumer confidence (see figure 1). Moreover, government consumption continued to increase (+0.8%) in Q2 while the growth in fixed investment declined significantly. The slowdown in fixed investment growth was mainly due to a lull in the construction sector, which had been expanding over the past few years. Overall business condition in Germany remains positive with the business confidence index hitting a record high in July 2017 (see figure 2).

Chart 1: Germany unemployment rate and wage growth

Chart 2: Germany's business confidence

Eurozone’s PMI Flying High in September

Apart from the GDP data, the Eurozone economy also found fresh momentum in September, with the composite Purchasing Managers index climbing to 56.7 in September from 55.7 in August (see figure 3). The highest PMI reading since May 2017 portrays a picture of a stronger 3Q economic growth in the Eurozone. According to the survey, the manufacturing activity in the continent grew at the fastest rate in more than six-and-a-half-year period as the exports continue to escalate, in line with the global recovery. The September’s momentum was mainly driven by the two largest Eurozone members – Germany and France, with PMI hitting 77 months and 76 months high.

Chart 3: Eurozone's PMI

Encouraging Earnings Growth

In addition, we also saw corporate earnings continue to trend higher. As of mid-September 2017, about 300 European companies listed in Stoxx 600 have reported their earnings for Q2 2017. Of these, more than 50% of them registered earnings above the analyst estimates and more than 52% of them posted revenues that outperformed the consensus estimates. After several years of downward revision in corporate earnings, we are starting to see more analysts turning positive on the earnings of these European companies with upwards revision in earnings estimates for 2017, 2018 and 2019 (see figure 4). As we believe that the corporate earnings is the main driver for the equity market, the European market is likely to trend higher moving forward underpinned by encouraging earnings growth.

Chart 4: Earnings revision for European companies

Sentiment Index Trending Up

Apart from the improving fundamentals in the European market, one might notice that the financial condition and confidence index indicate that the financial market experts are having positive expectation on the economic development, with all the three indices trending upward over the past few months (see figure 5). In fact, we believe that the improving sentiments would be a result of abating political uncertainty in the continent.

The ZEW Eurozone Expectation of Economic Growth is an amalgamation of the sentiments of 350 economists and analysts regarding the future economic development in Eurozone while Sentix Sentiment Eurozone Economy Expectation is a survey of about 2800 respondents regarding the economic outlook of Eurozone for the next six months. An index value greater than zero indicates optimism while a value below zero indicates pessimism. Besides that, the Financial Conditions Index tracks the overall level of financial stress in Euro’s bond, equity and money markets which help to assess the availability and cost of credit. A positive value indicates accommodative financial conditions, while a negative value indicates tighter financial conditions relative to pre-crisis norms (1999 – July 2008).

Chart 5: Eurozone's sentiment index

AmSchroders European Equity Alpha

With all the positive factors mentioned above, we believe that the European market would be one of the potential markets that investors should not ignore and as such, we would like to recommend AmSchroders European Equity Alpha as the fund choice for October for investors to tap into the opportunity.

AmSchroders European Equity Alpha is a feeder fund that invested in Schroder ISF European Equity Alpha (target fund). The fund aims to provide investors with capital growth primarily through investment in equity securities of European companies. The fund manager adopts a concentrated investment strategy with portfolio holdings of not more than 50 companies. As such, the fund would be relatively riskier due to its concentrated investment strategy. Apart from that, the fund is managed with a value-style basis, where the fund manager prefers those companies that are deemed to be undervalued by the market.

Why AmSchroders European Equity Alpha?

1. Concentrated Strategy

Although diversification is essential for one to reduce the portfolio risk, by having too many securities in one portfolio, it might lead to over-diversification, where in some cases, the securities are included in the portfolio solely for the purpose of dampening volatility instead of a fundamental pick. As we mentioned earlier, AmSchroders European Equity Alpha adopts a concentrated investment strategy, where the securities in the portfolio might be the highest-conviction investment idea of the management team which might lead to potential outperformance. Therefore, for investors who want to ride on the recovery trend in the European market, AmSchroders European Equity Alpha would be a better alternative.

2. Outperformed Benchmark and Peer

Generally, fund managers will find it easier to outperform the benchmark in an emerging market due to the high level of market inefficiency. However, it is rare for a fund manager to consistently outperform the broad index in an efficient market like the US or the European market. According to the S&P, close to 85% of the European equity funds underperformed their benchmark, supporting the argument that passive investments offer greater value than their actively managed counterparts when investing into the developed countries.

However, over the past 5 years, AmSchroders European Equity Alpha has slightly outperformed its benchmark (MSCI Europe Index) (see figure 6). On top of that, the fund also outclassed its only peer on our platform – TA European Equity Fund over the 6 months and 1-year period (see figure 7), demonstrating its outstanding stock picking skill in order to deliver the decent performance.

Chart 6: Fund performance vs benchmark

3. Consistently Aggressive

Over the past one year, AmSchroders European Equity Alpha has been consistently aggressive in comparison to its only peer on our platform – TA European Equity Fund, with cash and cash equivalent below 10% of the total fund’s value. As such, we believe that this could also be one of the factors that led to the outperformance of the fund over past one year. Therefore, at this juncture, AmSchroders European Equity Alpha might be the best pick for investors to ride the rebound in the European equity market due to its aggressive investment strategy.

Chart 7: Funds' performance and cash holdings

Conclusion

Although the European equity market is currently trading at a premium against its fair PE, we believe that given the recovering outlook, diminishing political uncertainty and ameliorating sentiment in the continent, investors can take a tactical move to seize the investment opportunity in the European market. As such, for investors who share the same view as us, they can consider investing into AmSchroders European Equity Alpha given the high conviction strategies and good stock picking skills of the fund manager.


This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus, product highlight sheet (PHS), and if necessary, consulting with financial or other professional advisers. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Amongst others, investors should consider the fees and charges involved. The relevant prospectuses have been registered and lodged with the Securities Commission. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV. Where a unit split is declared, investors should be highlighted of the fact that the value of their investment will remain unchanged after the distribution of the additional units. All applications for unit trusts must be made on the application form accompanying the prospectus. The prospectuses and PHS can be obtained from Fundsupermart.com. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.