European equity funds lost out in August falls

The 10 largest European equity funds lost an aggregated 7% of their assets in the first two weeks of August as panic about the future of the euro zone rocked markets, leaving many scrambling to persuade clients not to redeem their stakes.

The funds, running an indicative €23.1 billion in assets as of the end of July, had lost a total of €1.6 billion by August 12, according to data from Lipper. It represents a loss of confidence in the health of the region's banks and the ability of policymakers to heal them.

Managers presiding over asset falls are now trying to avert the threat of client withdrawals, as tumbling share prices slash the value of the assets they run.

‘I am just like every other long only fund manager. No money is going into Europe,’ said John Arnold, who manages the AGF European Equity Class Fund, which was down about 10% in the week to 05 August after hits on key holdings like Societe Generale and BNP Paribas. However, the fund posted a 1.59% gain in the week to 12 August.

‘You are dealing in a void where most fund managers, apart from their dividend income, are facing redemption. The long only managers are in a sense trending out not by intention but because simply that is what the clients are doing,’ he added.

Fidelity's European Growth fund, the largest of the 10 with €7.38 billion in assets, shed 10.8% of its assets in the first week of August, before rebounding 4.96% in the following week. The fund closed the fortnight with €433.4 million in losses.

Having shed between 5.41 and 11.6% of their assets in the first week of August, all but two of the 10 funds managed to recoup some of the losses in the second week of the month, according to Lipper.

Several European countries have now imposed a ban on short selling of financial stocks in an effort to reduce speculation and calm markets but prime brokers and traders say it has been fund managers selling their holdings rather than short selling by hedge funds that has led to heavy falls in banking stocks seen in recent weeks.

Equity funds were losing assets even before August's market rout. Lipper data shows that long term fund sales in Europe, excluding money market flows, fell 40% in the first half of 2011 compared with a year earlier.

In June, investors redeemed more than €25 billion from the European funds industry, mostly from money market funds, the data also showed.

One of the reasons banks were so heavily sold last week is that investors are still unsure they have the full picture of their financial position, according to Geoffroy Goenen, co-head of the European Equity team at Dexia Asset Management.

‘Two to three years ago, it was more an issue of liquidity, it was a question of toxic assets gaps and balance sheets. Today it more a question of confidence,’ he explained.

Goenen has steered his fund, the Dexia Equities B European Finance, underweight in banks. The fund last week saw the value of its total assets fall 1.11%. ‘A lot of retail clients were asking what to do and my answer on that was I won't be in the sector. I can go in financials that are not banks,’ he said.

Societe Generale, whose share price dropped by as much as 15% last week, however, has proved an exception. ‘Sometimes you have to think of risk/reward, and we definitely think that at €20 there is value in the bank,’ he added.

Manu Vandenbulck, senior portfolio manager at ING's Europe High Dividend fund, echoed Goenen's feelings. ‘We are underweight now in financials, but we have been active on selected opportunities,’ he told Reuters.

The fund, with about €600 million under management, outperformed its peers returning 2.78% in the second week of August and returning -7.23% the previous week, according to Lipper.