German equities is one of only two single country markets in Europe that Rabobank’s clients can specifically invest in. “At the moment we only invest in German equities through an ETF, but I’m currently looking for an active fund to add to our white list,” she says. Overall, German equity fund managers’ quality has improved in recent years, Moennasing believes. “They tend to be more unconstrained now.”
Rabobank also invests in Netherlands equity funds. It gets around the dismal track record (see page 1) by avoiding those funds that only invest in large caps. “Since there are no large cap funds that beat the index, we select funds that focus on mid and small caps. These funds have a better chance to outperform because markets are less efficient in the small cap space,” she explains.
Proof that such an approach can bear fruit is the Kempen Orange Fund, which has been on Moennasing’s buy list for several years. Over both three and five year-periods it has generated returns in access of the large cap AEX Index (see graph above).
Single country funds have had an in many cases well-deserved battering in recent years, which shows they are no exception to Darwinian natural selection: only the fittest will survive. In this case, it means they have to become more active and widen their investment universe. Small cap funds also tend to have higher exposure to domestic economies. This is increasingly harder to come by in a globalising world, and would give fund managers an additional edge.