Why Was 2015 Disappointing for the Franklin Mutual European Fund?

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Performance evaluation

The Franklin Mutual European Fund – Class A (TEMIX) fell 3.4% in December 2015 from the previous month. In the three-month period ending December 31, the fund rose 3.7%. In the six-month period, the fund fell 5.1%. In the one-year period, the fund has returned just 0.5%. Meanwhile, from the end of December until the end of January 22, the fund fell 8.3%.

TEMIX was barely able to keep its head above water in 2015, posting the smallest gains among the funds in this review. It did not finish dead last though, as one fund posted negative returns for the year. Thus, TEMIX stood ninth among the ten funds in this review. Let’s look at what has contributed to the fund’s disappointing performance in 2015.

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Portfolio composition and contribution to returns

TEMIX has been around since July 1996. According to its latest geographical disclosure, companies from the United Kingdom, Germany, and France, in that order, have the most weight in the fund’s portfolio.

The latest complete portfolio breakdown available for the fund is from September 2015. Thus, we will take that portfolio as our base and consider valuation changes as they stand at the end of December 2015 for our analysis. All portfolio percentages mentioned from here on refer to their weights as per changes in valuation from September to December.

Financials were the biggest positive contributors to the fund’s returns in 2015. The United Kingdom’s Direct Line Insurance Group was the biggest individual contributor to the sector’s returns. Belgian insurer Ageas and the Netherlands-based NN Group were also among the major positive contributors. However, Germany’s Commerzbank, Italy’s UniCredit (UNCFF), and the UK’s Barclays (BCS) and HSBC Holdings (HSBC) offset some of the positive contributions. Some other positive contributors included METRO (MTTRY) and Deutsche Telekom (DTEGY).

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The materials and consumer discretionary sectors hurt the fund in 2015. While LafargeHolcim and Anglo American (AAUKY) hurt the materials sector, the consumer discretionary was dragged down by Television Francaise 1, the preference shares of Volkswagen AG (VLKAY), and the C series shares of Liberty Global (LBTYA). The energy sector was hurt by negative contributions from Royal Dutch Shell (RDS.A) and Repsol.

Reasons for disappointing performance

Almost nothing went right for TEMIX in 2015. The financials sector and a few stock picks here and there contributed positively, but there was very little else to write home about. Substantial negative contributions from some stocks, especially those with higher allocation, only worsened things for the fund. Investors would do well to look at the fund’s performance across market cycles in order to decide the future course of action for their investment in the fund.

In the next article of this series, we’ll look at the JPMorgan Intrepid European Fund – Class A (VEUAX).

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