Old Mutual European Equity
This fund has its share of strengths but investors must approach it with caution.
The firm has recently combined all five divisions into one entity and moved Dr Gavin Brown from head of quant research to overall head of the team. As a result of this restructure, three members have left the portfolio construction and management unit, including head of the division Mark Stevens. Although these departures concern us, Brown has already rebuilt the team once before in 2004, when head of quant David Ross and three other members left the firm. Our bigger concern lies with the parent, given the high turnover of staff in general in the last eight years.
The model encompasses a mix of value, momentum and managerial factors, with weightings applied in this order. The team monitors the factors on an ongoing basis in an effort to keep up with changes in the market. For example, the team introduced a leverage indicator following the credit woes in mid-2007 to help avoid firms likely to be worst hit by the credit crunch. The model screens around 460 Europe (ex-UK) stocks to narrow down the universe. The portfolio has no sector restrictions or top-down overlay and therefore the model factors determine its structure in entirety. The relatively high emphasis on valuation has created a bias towards value stocks, particularly financials in early 2007, whilst the momentum factor highlighted smaller-cap issues as small caps have rallied over the last few years. Owing to such biases, the fund can struggle in certain market environments. In 2007, the tilt towards value and smaller-cap stocks backfired as both took a dive and this prompted the fund to end the year in its category’s bottom decile.
That said, the fund’s performance is comparable with its peers’ in the Morningstar Europe Ex-UK Large-Cap Equity category since the quant process was introduced in 2000 and also over the new team’s tenure. The fund’s returns clock in at 11.59% per annum on an annualised basis versus 11.56% for the category average since the team took charge in December 2004. However, investors should expect a bumpy ride as the fund is highly volatile both in absolute terms and relative to its peers. While the fund tends to outperform markets considerably during upturns, it struggles when the markets turn ugly.
We are encouraged by the ongoing resources invested in the model. However, this fund hasn't done enough to truly set itself apart from its peers – it has offered average returns with above-average risk and the changes at the team and an above-median TER are further cause for concern. It is a serviceable offering, but not at the top of our list.
