Financials Disastrous for Franklin Mutual European Fund This Year


Jul. 27 2016, Published 3:34 p.m. ET

Performance evaluation of the Franklin Mutual European Fund

The Franklin Mutual European Fund Class A (TEMIX) has fallen 6.5% YTD (year-to-date). This makes it a below-average performer in the group of 12 funds chosen for this review. In the one-year period ended July 15, 2016, the fund figured among the bottom three.

We’ve graphed its performance against the Vanguard FTSE Europe ETF (VGK) and the iShares MSCI Eurozone ETF (EZU).

Let’s look at what has contributed to the fund’s poor performance YTD.

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Contribution to returns

The fund’s stock picks from the financials sector have supplied all of the negative contributions related to its poor showing in 2016 so far. In fact, the amount of the sector’s negative contributions is higher than the fund’s overall negative returns. It has, however, been reduced by positive contributions from other sectors.

UniCredit (UNCFF) and NN Group have weighed on the sector the most. Though NN Group is still part of the fund’s portfolio as of June 2016, UNCFF has been liquidated. Barclays (BCS), Royal Bank of Scotland Group (RBS), and UBS Group (UBS) are among a host of stocks that have led the sector down.

Contribution from the telecommunications services sector could have been only marginally negative, but Euskaltel ensured that the sector’s negative contribution was sizable. Meanwhile, Liberty Global (LBTYA) and Volkswagen (VLKAY) have led the consumer discretionary sector into negative territory, and Nokia (NOK) has done the same with the technology sector.

The energy sector has been instrumental in reducing some of the fund’s overall negative performance. All holdings from the sector, including Royal Dutch Shell (RDS.A) and BP (BP), have contributed positively. GlaxoSmithKline (GSK) has ensured that healthcare has contributed positively, while Arkema has done the same for the materials sector.

Consumer staples is also a positive contributor, primarily due to Metro, though not by much. Meanwhile, Enel (ESOCF), the sole holding from the utilities sector, has contributed positively to the fund’s returns.

Investor takeaway

TEMIX has noticeably underperformed the passively managed SPDR EURO STOXX 50 ETF (FEZ). Though its stock picks from some sectors like utilities, materials, health care, and energy have done markedly better than those in FEZ, its picks from the financials sector have dragged it down. Given that financials is the fund’s largest sector, this outcome is not surprising.

However, the amount of negative contribution from the sector certainly is. It’s important to note that the fund’s management has been reducing its exposure to financials. It remains to be seen whether this reorganization of the sector will work for the fund.

In the next article, we’ll look at the Europe 30 ProFund Investor Class (UEPIX).


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