Today’s piece in Barron’s profiles the Henderson European Focus Fund (HFEAX; Class A shares). This $3.7 billion European equity fund has a 5.75% maximum sales charge, 1.31% operating expense and 75% turnover. According to the article

Under [the manager’s] guidance, the fund has returned an average of 14% a year, more than twice the MSCI Europe index.

The primary benchmark for the fund is the MSCI Europe Index. The only available ETF tracking this index, the iShares Core MSCI Europe ETF (IEUR), has been in existence since June 2014. Therefore, we will instead use the iShares Europe ETF (IEV) for comparison purposes. Alpholio™’s calculations show that since inception the fund returned more than the ETF in approximately 93% of all rolling 36-month periods, 87% of 24-month periods and 84% of 12-month periods. The median outperformance over a rolling 36-month period was 23.5%.

While comparing returns is useful, it does not account for the fund’s risk. Let’s apply a variant of Alpholio™’s patented methodology which constructs a dynamic reference ETF portfolio for each analyzed fund. The ETF membership in such a portfolio is fixed but the ETF weights can change over time to better track the analyzed fund. Here is a chart of the cumulative RealAlpha™ for the Henderson European Focus:

Cumulative RealAlpha™ for Henderson European Focus Fund (HFEAX)

Over the past 11 years, the fund generated about 4.5% of the regular and 4.1% of lag annualized discounted RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). However, the fund did so mostly since 2009 and with high volatility: its standard deviation was around 22.5% vs. 19.5% for the reference ETF portfolio. The fund’s RealBeta™ of 1.22 also underscores its risk.

The following chart illustrates changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Henderson European Focus Fund (HFEAX)

The fund had top equivalent positions in the iShares MSCI United Kingdom ETF (EWU; average weight of 30.6%), iShares MSCI Germany ETF (EWG; 14.3%), iShares MSCI Canada ETF (EWC; 11.2%), iShares MSCI Eurozone ETF (EZU; 11.1%), iShares MSCI Italy Capped ETF (EWI; 8.5%), and iShares MSCI Sweden ETF (EWD; 7.5%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

It is worth noting that according the fund’s summary prospectus

Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of European companies.

This supports the finding that at times the fund had a considerable exposure to Canadian stocks (or natural resources), as indicated by its equivalent position in EWC.

Under the same management since inception, the Henderson European Focus Fund added a significant amount of value, although at the expense of elevated volatility. The fund’s steep front load detracts from its appeal. At times, the fund had significant distributions (e.g. over 5.8% of NAV in 2011), which could potentially make it less suitable for taxable accounts going forward.

To learn more about the Henderson European Focus Fund and other mutual funds, please register on our website.

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