The Financial Times Limited
Financial Times (London)
July 27, 1999, Tuesday
Sectors gain as country funds lose appeal: Demand for sectoral funds has picked up considerably since the launch of the single currency
As recently as last year, fund managers on the Continent of Europe were putting money into French, German or Dutch funds without worrying about pharmaceutical, automotive or brewing industry portfolios.
But half a year after the introduction of the single currency, there has been a change in the criteria for investment.
Country funds are still as important as sector funds in the euro-zone, say Joanna Munro and Andrew Fleming at ABN Amro Global Consulting Group in London.
The single currency has abolished foreign exchange risk, but European industries are not yet as integrated as in the US in order to give sector funds the edge. Consequently, industry specific funds are advancing rather slowly over country funds, says Bryan Allworthy, an equity strategist at Merrill Lynch, the investment company, which updates the Merrill Lynch Gallup Survey of Continental European fund managers every month.
Nevertheless, demand for sectoral funds has picked up considerably since January, with 55 per cent of managers now selecting funds on the basis of sector, up from 35 per cent.
Country funds have lost their appeal, having fallen from 45 per cent to 35 per cent.
While the bias towards industries throughout 1999 has been steady, progress has been hindered by two particular events: the sudden depreciation of the euro against the dollar and the resignation in April of Oskar Lafontaine, the leftwing German finance minister, which reminded everyone that country risk was still a possibility in a united Europe.
ABN Amro, the Dutch bank, has been among the leaders in sector-based funds since it launched its Trans-Europe Fund in 1985.
Fourteen years later, it has outperformed the MSCI Europe Benchmark index.
However, industry orientation has been hindered by inappropriate sector selection, Munro and Fleming conclude in a study.
Companies at a very similar stage in the value-adding chain should be merged into funds, but that is not what you necessarily find on the managers' lists today.
Service industry funds tend to include both transportation and publishing equities but the return curves are so different among those classes of stocks that the return of one is watered down by the other, Munro and Flemings argue.
Some euro-zone industries are already more integrated than others. The chemical, automotive and manufacturing industries have been at the forefront of internationalisation but others, such as utility companies, still resist becoming supranational, insists Mr Allworthy.
Moreover, Munro and Fleming found that in Europe industries differ substantially in their geographical distribution, and similarly the 11 euro-zone economies have a different industrial composition.
The continent's pulp and paper industry has its natural strengths in the north, whereas the leisure industry favours sunny regions in the south.
That results in an unequal asset distribution: for example, forest industry funds are in demand in Scandinavia but not in Italy or Spain, while leisure industry funds sell much more in Italy than in northern Europe.
The Swiss SMI index is almost 40 per cent comprised of healthcare companies while Mibtel, its Italian equivalent, includes none, says ABN Amro.
In Ireland, the construction industry accounts for 9 per cent of the gross domestic product, whereas it contributes just 2 per cent to the German economy, adds Mr Allworthy.
Meanwhile, in response to additional demand in the last six months, DWS, the asset management subsidiary of Deutsche Bank, Europe's largest bank, has added new funds to its portfolio, a spokesman said.
These include retail and healthcare funds, which to date have accounted for 26 per cent of the bank's new funds investments.
However, those funds shy away from an exclusive European focus, with close to 80 per cent of the portfolios currently invested in US stocks. But country funds are still popular with institutional and retail investors.
After all, investment demand is not only large enough to let country funds survive, but also to encourage investors to experiment with sectoral ones too.