Almost Nothing Good about TEMIX in 1Q16

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Performance evaluation of the Franklin Mutual European Fund

The Franklin Mutual European Fund – Class A (TEMIX) fell sharply by 6.5% in 1Q16, placing it second to last among the 12 funds in this review. In the past one year, TEMIX has fallen 13.2%, putting it dead last in the pack of 12 funds. Meanwhile, from the end of December until April 25, 2016, the fund rose 2.6%. In the graph below, you can see its performance against two ETFs: the Vanguard FTSE Europe ETF (VGK) and the iShares MSCI Eurozone ETF (EZU).

Let’s look now at what has contributed to TEMIX’s poor performance in 1Q16.

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Portfolio composition and contribution to returns

Financials, TEMIX’s largest invested sector, was the primary driving force behind the fund’s poor showing in 1Q16. UniCredit SpA (UNCFF) and Barclays (BCS), in that order, were the biggest negative contributors to the sector during the period. Royal Bank of Scotland Group (RBS), Société Générale, and a host of other stocks made sizable negative contributions as well.

The information technology sector was another major negative contributor, driven down by one company—Nokia (NOK). Nokia’s sponsored ADR (American Depository Receipt) and Nokia Oyj hurt the sector almost equally.

Energy stocks, which form 6% of TEMIX’s portfolio, emerged as the biggest positive contributor to its returns in 1Q16. Cairn Energy was the biggest individual contributor. Others included BG Group and Royal Dutch Shell (RDS.A).

Industrials closely followed energy in terms of positive contribution. FLSmidth and Koninklijke Philips (PHG) jointly led the positive contributors for the sector. Meanwhile, Enel SpA (ESOCF), the sole holding from the utilities sector, contributed positively to TEMIX’s returns.

Investor takeaways

Stock picks from several sectors contributed positively to TEMIX’s returns in 1Q16. However, the beat down by financials was so harsh that all those positive contributions couldn’t overcome it. This led to TEMIX figuring among the bottom two funds for performance.

TEMIX’s picks from the consumer discretionary, energy, healthcare, and utilities sectors did better than those sectors in passively managed VGK. But the financials and information technology sectors did far worse than VGK, thus leading to the poor performance.

Existing investors whose returns have been driven down may not have much choice but to wait for better days for the fund. Prospective investors may want to see the fund’s performance across business cycles and see whether it fits their investment horizon.

In the next part of this series, we’ll look at the Europe 30 ProFund – Investor Class (UEPIX).

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