The Energy and Materials Sectors Pulled VEURX into the Red in 2015

The Vanguard European Stock Index Fund – Investor Shares (VEURX) fell 2.4% in December 2015 from the previous month. In the three-month period ended December 31, the fund rose 2.2%. In the six-month period, the fund fell by 2.2%. In the one-year period, the fund has returned -2.0%, making it the only fund in this review to have posted negative returns in 2015. Meanwhile, from the end of December until January 22, the fund has fallen 7.7%.

The fund was the worst performer for 2015 among the ten funds in this review. Let’s see what hurt the fund in 2015.

The VEURX is one of the older funds in this review. It was launched in June 1990. According to its latest geographical disclosure, companies from the United Kingdom, Switzerland, and France, in that order, have the most exposure in the fund’s portfolio. Switzerland replaced France in the second spot last month.

Unlike any of the other nine funds in this review, this product is not actively managed. Its sectoral performance can give you an idea of the performance of the European stock market in general and its underlying benchmark, the FTSE Developed Europe All Cap Index, in particular. Thus, this can serve as a broad benchmark to all of the other funds’ performances.

Consumer staples contributed the most to the fund’s returns in 2015. Among the fund’s holdings from the sector, Nestlé (NSRGF), Imperial Tobacco Group (ITYBY), and Anheuser-Busch (BUD) contributed the most. Tesco (TSCDY) led the decliners, but their negative returns were quite low and did not drag the sector’s contribution down by much.

Healthcare was the second highest positive contributor to the fund’s returns. The B shares of Novo Nordisk (NVO) nearly singlehandedly brought the sector up. Like staples, the negative contributors did not drag much on the sector.

However, energy, materials, and financials not only undid the positive contribution by the other sectors, they pulled the returns of the fund into negative territory. Both A (RDS.A) and B shares (RDS.B) of Royal Dutch Shell were the primary detractors for energy stocks. Materials were driven down by Glencore (GLNCY) with negative contributions coming from Anglo American (AAUKY), BHP Billiton (BHP), and Rio Tinto (RIO) as well. Banco Santander (SAN) not only hurt the financial sector, it was among the biggest individual negative contributors among all holdings.

Due to the fund being passively managed, fund management has no research role to play. Thus, stock picking and sectoral allocation play no role in its composition or performance.

Financials, the fund’s largest component, hurt its returns, apart from energy and materials. The latter two contributed more to dragging the returns of the fund down than financials did, but the large portion of financials ensured that any negative contribution from the sector will pretty much ensure a poor showing by the fund. Since the composition of the fund has changed recently, it would be interesting to see how the fund fares in 2016, its first full year after changing its benchmark.

Let’s move on to the last Europe-focused mutual fund under review in this series: the Virtus Greater European Opportunities Fund – Class A (VGEAX).