With investors› appetite for risk diminishing, equity markets are having a tough time this year. Despite a war raging on Europe’s external borders, European shares are holding up relatively well. However, this mainly applies to so-called large-caps, because shares of smaller companies are deeper in the red.
Investors have become increasingly risk-averse this year and have sold off shares worldwide. Rising inflation, falling economic growth, the prospect of interest rate increases and geopolitical tensions do not bode well for risky investments.
European equities certainly did not escape, but over the first five months of the year they have lost 6.63%, while the global MSCI World has lost 7.61%. This in itself can be called remarkable, since one of the major triggers for the unrest in the financial markets, the war in the Ukraine, is taking place on our external borders.
Mid- and small-caps seen as more risky
The economic consequences of this war will therefore mainly be felt in countries on our continent. Just think of the increased energy prices, which are making themselves felt in the pockets of European consumers. Smaller companies, or mid- and small-caps, often operate more locally and will therefore be hit even harder than the large multinationals that often operate globally. Add to this the fact that shares of these mid- and small-caps are considered more risky by investors and the disappointing performance of this year is largely explained.
For example, both the MSCI Europe Mid Cap index and the MSCI Europe Small Cap index fell by 13%, or twice as much as the large-cap dominated MSCI Europe index. Among smaller companies, a style factor is also important. As with large-caps, value stocks, such as those in the energy and financials sectors, have fared much better than growth stocks, including those in the healthcare and technology sectors. For instance, the MSCI Europe Mid Value index fell by only 5.82%, while the MSCI Europe Mid Growth index plunged by 19.32%.
This week’s Top 5 lists the five best-performing funds (of which a distribution fee-free share class is available in the Netherlands) in the Morningstar Europe Mid Cap Equity category based on their performance over the first five months of 2022.
DWS Invest ESG European Small/Mid Cap
The fund that best managed to limit losses this year is DWS Invest ESG European Small/Mid Cap and therefore takes the lead position. The fund was launched in October 2018 and has since been managed by a five-person team consisting of Philipp Schweneke, Christian Schindler, Christina Resin, Oliver Pucker and Valerie Schueler. In their investment approach, they focus on companies with strong fundamental business quality and good ESG quality of the company. Preference is given to companies that show above-average growth in revenue and profitability in a sustainable manner. In the portfolio of over 60 positions, this led to top positions in Rexel, Scout24 and IG Group at the end of April 2022, for example. Compared to peers, performance in 2022 was driven by an overweight in financials and an underweight in the healthcare and technology sectors. Above all, however, it was good stock choices that had a positive impact on relative performance; these stocks included Bankinter, Solaria Energia y Medio Ambiente and Pearson.
BNP Paribas Funds Euro Mid Cap
Second place is for BNP Paribas Funds Euro Mid Cap which has been owned by Damien Kohler since September 2017. His portfolio consisted of only 34 stocks at the end of April 2022, which characterises his high conviction approach, with NN Group, Teleperformance and Smurfit Kappa having the largest weightings. In addition, the portfolio is mainly concentrated in the financials and industrials sectors, which together make up almost half of the portfolio, while it is heavily underweight in the healthcare and technology sectors. It is precisely these sector preferences that also contributed to its relatively strong performance compared to other funds in the category. His stock selection was also a strong contributor, including Telefonica Deutschland, Aeroports de Paris and Edenred.
As per asset class for the Netherlands:
As per asset class for Belgium:
Ronald van Genderen is a senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds on the basis of quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.
This article was originally published on InvestmentOfficer.nl.
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