HEAD-TO-HEAD: Franklin versus MFS

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Mathieu Caquineau, Morningstar

Introduction

European stock markets have bounced back this year, after a pedestrian performance during the previous five years. Of course, their rise hasn’t been as vigorous as the S&P 500, but several country indices have escaped the doldrums.

The MSCI Europe index is up 17.25% year-to-date in US dollar terms, lagging the S&P 500 (26.07%) and the MSCI World (21.79%), according to FE Fundinfo. But a notable recovery has been enjoyed by stocks in the UK; although the country is no longer part of the European Union, index providers and fund managers sometimes act as if Brexit didn’t happen.

Those managers who have included UK stocks in their European portfolios have prospered: the performance of the FTSE 100 is challenging the S&P 500, having surged 24.9% so far in 2021.

The recovery in European equities has prompted caution among money managers. Amundi Asset Management now “maintains a balanced stance”, with a tilt towards normalisation and reopening, and implement this view through a barbell approach of quality cyclical stocks in industrials and financials, according to it November investment outlook.

“Here, the economic reopening is not fully discounted by the market and thus valuations are selectively attractive. On the other hand, the picture in the consumer and energy sectors looks mixed,” it said. In the latter, Amundi has become more cautious because of the strong run lately and are looking for “answers beyond the earnings season”.

Moreover, amid a spike in energy prices, economic recovery continues in Europe but “valuations are extreme in some segments and are not justified by high inflation, which pressures companies to absorb costs, thereby affecting margins”.

Amid the high valuation dispersion, Amundi advises investors to prioritise selection and explore value and quality stocks that can withstand price pressures through strong pricing power or a dominant market position beyond the current earning season.

Against this background, FSA asked Mathieu Caquineau, associate director, manager research at Morningstar, to select two European equity products for comparison: the Franklin Mutual European Fund and the MFS Meridian European Research Fund.

Source: FE Fundinfo, Morningstar. (Data in US dollars, 5 November 2021)

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