Best European stock funds beat market despite Brexit drama

This year may have been a tumultuous one for Britain, but some equity fund managers are making a killing despite the volatility.Among this year’s 10 best-performing European stock funds with assets exceeding $1bn, four are focused on small and mid-sized UK companies, according to data compiled by Bloomberg.JPMorgan Asset Management and Aberdeen Standard are some of the firms reaping market-beating returns of at least 23%. The result can seem counter-intuitive because smaller companies are seen as more exposed to the domestic economy and thus the most likely be hurt by the uncertainty surrounding the UK’s departure from the European Union.Franklin Templeton’s Paul Spencer, whose £1.1bn($1.4bn) Franklin UK Mid Cap Fund has beaten 95% of peers this year, has been navigating the Brexit turmoil by focusing on individual company fundamentals instead of ephemeral political headlines.“In the absence of my crystal ball, the outlook is pretty uncertain and my expectations for the fund’s performance have been greatly exceeded this year,” Spencer said in a phone interview. “UK is very under-owned. So what we’re seeing right now is a slow return of investors to UK mid-caps.”Indeed, investors have been avoiding UK equities for years and the country’s stock market is the least popular in the world, according to a Bank of America fund manager survey this month. But that sentiment may start to change after Parliament on Tuesday voted in favour of Boris Johnson’s Brexit deal, making Britain’s EU departure a more realistic prospect, even if it’s again delayed.Johnson yesterday cancelled a cross-examination session by senior lawmakers as speculation mounted the prime minister will try again to force a general election to break the Brexit deadlock.In a sign that investors are embracing improved political clarity and hopes for an economic recovery, a Vanguard exchange-traded fund that tracks the mid-cap FTSE 250 Index had a record inflow of £91.2mn this week. The FTSE 250 has gained 15% this year, almost double the result for the FTSE 100 Index of the largest British companies.However, Spencer warns that it’s too early to become optimistic about the British economy. That’s one of the reasons that 55% of operating earnings for the companies in the fund come from overseas.“We’re not out of the woods yet. We’re carefully watching the latest data releases to gauge the state of the economy,” he said. “If we get a positive resolution to the political tensions and/or a US-China trade deal, investors will return to UK mid-caps.”Among the stocks that fuelled the outperformance of the Franklin Templeton fund is Entertainment One Ltd, which is up more than 50% this year mainly as a result of Hasbro Inc’s decision to buy the studio that makes the Peppa Pig children’s TV show. Other gainers include Spirent Communications Plc, which has risen 70%, and Intermediate Capital Group Plc, a private equity firm that’s up 57%.Intermediate Capital is also one of the top holdings at JPMorgan’s Mercantile Investment Trust, which has handed investors a return of 34% this year. The portfolio manager Guy Anderson says the fund focuses on businesses with long-term growth opportunities that delivered results in spite of “political and economic bumps.”Other top-performing European stock funds include Aberdeen Standard’s ASI UK Smaller Companies Fund, up more than 25% in 2019, and Aberforth Smaller Companies Trust Plc, up 23%. The manager behind Aberdeen’s fund, Harry Nimmo, is similar to Franklin Templeton’s Spencer in that he also doesn’t base his investment decisions on politics.“We consider it futile to make any sort of political, currency, economic predictions,” Nimmo said by phone. “It’s the best, high-quality companies that are best able to thrive in difficult economic and political circumstances.”