Performance Is No Life Jacket for JPM European Mutual Fund

Despite positive performance, J.P. Morgan Asset Management is set to close its second European mutual fund in less than 12 months.

JP Morgan Funds–European Focus Fund will be closed on February 17, after assets in the fund dropped below $30 million, the liquidation trigger outlined in its prospectus.

The fund launched in 2006 and had as much as $125 million in assets under management as of 2014; however, that number dwindled to just over $15 million as of January 24, 2017. In a statement to Institutional Investor, the asset management division of JPMorgan Chase & Co. said, “With limited prospect of attracting new subscriptions, the Board felt it was in the interest of shareholders that the vehicle be liquidated.” The fund is managed by Ido Eisenberg and Rajesh Tanna, who currently oversee four other European equity funds.

J.P. Morgan Asset Management has had difficulty attracting assets to some of its European flex-cap equity strategies. In August of last year, the group announced it would be liquidating JP Morgan Funds–Euroland Focus Fund after five years, saying that fund had failed to consistently keep its assets under management above the $30 million liquidation trigger.
 
The closures come as a surprise, given that both funds had maintained positive performance. The European Focus Fund ended 2016 up 17.9 percent and was up 1.56 percent year-to-date through January 24, 2017, according to Morningstar data. The Euroland Focus Fund returned 4.5 percent in 2015, its last full year of operations, according to fund data available from J.P. Morgan Asset Management.

Other funds within the same investment category on Morningstar show similarly positive performance but haven’t had the same issues maintaining assets. According to Greg Bennett, co-manager at £700 million Argonaut Capital Partners, a London-based European equities manager in the flex-cap category, keeping investors interested in Europe is challenging, and those that leave may miss out on a value trend. “The headlines are all focused on the political issues and the economic fortunes of Europe, and investors are saying, ‘I don’t want to mess with it,’” he explains. “However, European equities are well above their 30-year average.”

In a statement to Institutional Investor, Anoushaa Massouleh, a spokesperson for J.P. Morgan Asset Management, added that the firm isn’t washing its hands of Europe entirely: Investors wishing to maintain a European equities exposure could consider the JP Morgan Investment Funds–Europe Select Equity Fund or the JP Morgan Funds–Europe Dynamic Fund. Both are well capitalized and have returned similar performance to the recently liquidated funds, according to Morningstar data. J.P. Morgan has some €33 billion in client assets under management in European equities through its other Europe-focused funds.

Argonaut’s Bennett says investors looking to Europe need to be prepared for another year of muddling through. A slate of upcoming elections, coupled with low interest rates and sluggish earnings growth, paint a dim picture for regional growth. “The big question right now is whether the reflation trade will work out,” he says, adding that investors are looking for ways to position portfolios defensively if the reflation trend has legs. In that case, asset flows may come back to equities funds. “If you say last summer was the top of the bond market in Europe, it may be worth considering an increase in equity exposures. The issues in Europe are essentially known knowns,” he contends.

If investors wait too long to move out of other positions and into European equities, they could lose out on some of the reflation trade, which already looks to be on the move even if the outcome isn’t totally certain. The Stoxx Europe 600 index climbed 0.7 percent on January 25, the biggest move in more than a week. Basic resource stocks in the index also climbed to their highest levels since 2014. Even European banks, which have been a source of distress in the broader European market, saw their subindex climb 1.9 percent on solid earnings news from Spain’s Banco Santander.

“The opportunity for long-term value investors is there in equities, more so than in other asset classes in Europe right now,” Bennett says. He points to big European names like Nestlé and Swiss computer peripherals maker Logitech as companies that have been consistent performers worldwide, regardless of headlines within the euro zone. “We’re also looking at commodities to have fundamental upside pressure if reflation continues,” Bennett says.