Index Composition Hurts the Europe 30 ProFund in August 2015

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Sep. 24 2015, Published 12:23 p.m. ET

Performance evaluation

The Europe 30 ProFund: Investor Class (UEPIX) tanked 7.8% in August 2015 from a month ago—the biggest decliner among the six mutual funds under this review. The fund has stood at the bottom of the returns table in the three-month, six-month. and YTD (year-to-date) periods ended August 31 as well, among its peers in this review. It has fallen by 10.2%, 10.5%, and 7.4% in these periods, respectively. Let’s look at what has contributed to this poor showing by the fund across these periods.

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Portfolio composition and contribution to returns

The UEPIX’s latest available complete portfolio is as of June 2015, hence, it’s a bit dated. Even the sectoral composition is available only as of June 2015. Due to this, we will do the sectoral and security-level analysis on the basis of the June 2015 portfolio.

According to its June portfolio, the top three sectors invested in by the fund were energy, information technology, and financials with exposures of 22.1%, 18.4%, and 16.9%, respectively. The consumer staples sector formed 11.3% of the fund’s portfolio and interestingly, it had no exposure to consumer discretionary stocks.

Information technology shares were the biggest negative contributors to return in August, led by France-based Criteo SA (CRTO) which underperformed other stocks in the sector by a huge quantum. Finnish company Nokia Corporation (NOK) and French telecom company Alcatel-Lucent (ALU) were other major negative contributors to return.

Financials also pushed the returns of the Europe 30 ProFund downward, led by HSBC Holdings plc (HSBC) and Barclays PLC (BCS).

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The energy sector, specifically Tenaris S.A. (TS), helped save the fund from further blushes. Although the sector was the largest holding of the fund, it did not contribute as much negatively to returns as information technology and financial sectors did. TS was the lone positive contributor to returns among stocks from the energy sector.

Consumer staples were led down by Unilever N.V. (UN) and British American Tobacco p.l.c. (BTI).

Primary reason for underperformance

The Europe 30 ProFund follows a passive strategy of investment, as it intends to replicate the performance of the underlying benchmark. Its portfolio sees a change only when the underlying benchmark changes its holdings. In a volatile market environment like this, the fund has seen this underperformance due to its very nature of staying put with the holdings of its index.

Investors need to see the performance of the fund over longer period in order to understand whether this fund’s investment strategy has worked in certain market cycles in the past and whether it is suitable for their investment goals.

In the next article, we will look at the Vanguard European Stock Index Fund Investor Shares (VEURX).

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