Why Have the Returns of the Franklin Mutual European Fund Improved?

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Performance evaluation of the Franklin Mutual European Fund

The Franklin Mutual European Fund – Class A (TEMIX) has done quite well in 2016 so far. Although it has missed a spot among the top three funds, it has managed to emerge as an above-average performer. The past year until October 21 has been even better, with the fund placed second among the 12 funds chosen for this review.

The past six months have seen the fund emerge as the best performer. We have graphed its performance against two ETFs: the Vanguard FTSE Europe ETF (VGK) and the iShares MSCI Eurozone ETF (EZU). Let’s look at what has contributed to the fund’s good performance in YTD 2016.

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Contribution to returns

The fund’s stock picks from the financials sector have been the chief detractors in 2016 so far. Italy’s UniCredit S.p.A. (UNCFF) and Assicurazioni Generali S.p.A., as well as the UK’s Barclays PLC (BCS), have been the chief negative contributors from the sector. Royal Bank of Scotland Group plc (RBS), XL Group Ltd (XL), and UBS Group AG (UBS) are among a host of stocks that have led the sector down.

The contribution from telecom services has been sizably negative as well, due to detractors like Euskaltel SA, Vodafone Group Plc (VOD), and Deutsche Telekom AG (DTEGY). Meanwhile, Liberty Global plc (LBTYA) and Volkswagen AG (VLKAY) have led the consumer discretionary sector into negative territory, and Nokia Corp (NOK) has done the same to the tech sector.

The strong positive contribution from materials and industrials is primarily responsible for the improvement in performance of TEMIX. Specialty chemicals company Arkema has powered materials while Koninklijke Philips N.V. (PHG) has engineered the performance of industrials.

The energy sector has been instrumental in reducing some of the overall negative contribution. All holdings from the sector, including Royal Dutch Shell plc (RDS.A) and BP plc (BP), have contributed positively.

Investor takeaway

TEMIX was not doing as well three months ago as it is presently. As the year has progressed, the fund’s performance has improved. Its stock picks from the utilities, materials, and energy sectors have done quite well. However, the financials sector remains a big concern.

A dip in returns from other sectors are expected to drive down the returns of TEMIX. The decline in the portfolio weight of financials has been due to decreased value as well as a reduction in the number of holdings. In our view, investors should exercise caution.

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

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