Belgian fund managers clock higher than Bel20

The increasing success of passive index funds or trackers is largely due to the shortcoming of actively managed funds. The majority of these funds usually fail to outperform the market after costs, pushing investors towards cheaper index products.

Not so on the Brussels stock exchange, where active fund managers seem to be succeeding in their goals. In 2023, five of the seven actively managed funds outperformed the only tracker that tracks the Brussels stock exchange, the Amundi Bel20 UCITS ETF. The best performances were for Antwerp asset manager Econopolis and Ghent's Value Square.

It is no coincidence that these are two fund houses that swam upstream a few years ago and set up a Belgium fund because they saw opportunities in an increasingly sparsely populated Brussels stock exchange. Last year, both managers achieved a return of around 6.8 percent after costs with their fund, significantly better than the 2.1 percent of the BEL20 tracker.

Strong smallcaps

The managers attribute the good performance to very active management in a volatile market. “Last year, for example, we made a relatively quick profit on a number of sharply increased values such as Melexis and X-Fab,” says Danny Van Quaethem, fund manager of Econopolis Belgian Champions.

“We also made a good 'negative' selection. Throughout the year, we were deliberately underweight in financial values, including holdings, and real estate. We also bet relatively high on strong small caps (companies with a smaller market value, red.), such as EVS or Van de Velde. Finally, in the second half of the year, we took a relatively large position in Proximus, which is at a historically low level,” says Van Quaethem.

Patrick Millecam, manager at Value Square and focused on Belgian stocks for 30 years, emphasizes the fund's investment philosophy, which it does not deviate from. “Our focus is on companies with good long-term prospects, that are cheap and that have the momentum. In 2023, X-Fab, Van de Velde, Jensen Group and EVS, among others, clearly contributed. EVS benefits from the entry of big tech players into the live sports event sector. Furthermore, the separation of Solvay worked out well for us: the two companies together are worth 29 percent more than the year before,” says Millecam. As the 'cheapest' Belgium fund, the Value Square fund also benefits from its low costs.

KBC Equity Flanders fared less well, which remained below the BEL20 tracker with a return of 1.4 percent in 2023. “Certain major positions such as Recticel and Azelis had a strong negative impact. However, we remain convinced of the medium-term value creation of these companies. We also found that strong operational performance in 2023 was not always rewarded. We are thinking of D'Ieteren, which made a meager return of 0.5 percent,” says KBC Asset Management.

In the longer term, the KBC fund's track record looks good. Over a period of five years, KBC Equity Flanders is even the best-performing fund, with an average return of 9.2 percent per year. Over that period, all Belgium funds are doing better than the BEL20 tracker. The average return of the Belgian funds over the past five years has been 6.9 percent on an annual basis, significantly better than the tracker's 4.3 percent. Even in ten years, there is a perfect report. The funds achieved an average of 6.1 percent per year, compared to an annual return of 3.7 percent for the index fund.

Small but nice

The fact that the Brussels stock market seems easier to beat than many other stock markets has a lot to do with the limited market capitalization and the lack of liquidity of the stocks that are listed there. For 7 of the 20 Bel20 stocks, the freely tradable market capitalization is less than 3 billion euros. And barely 13 million euros of the average Bel20 share is traded daily, far too little for large institutional investors who manage billion-dollar portfolios.

As a result, Belgian stocks are also monitored by fewer analysts, so there is more chance of inefficient market forces. This offers an excellent playground for active administrators.

The figures show that it is more difficult to beat the market in more liquid and more followed markets. We examined the performance of the country funds in a number of major euro area countries and compared them with a tracker on their main stock market index. Result: in France, Germany and Italy, no fund performed better than the tracker, neither in 2023 nor over a period of five years. In the three countries, both the average market capitalization, the average traded volume and the number of analysts who monitor the stocks are much higher than in Belgium (see table), making the markets there more liquid and perhaps more efficient.

Moreover, in recent years, those countries have been able to count less on the random factor triggered by the distribution rules. Funds are legally allowed to invest a maximum of 10 percent in one share, and the participations between 5 and 10 percent together cannot represent more than 40 percent of the fund. In a highly concentrated index such as the Bel20, where the ten largest stocks account for almost 80 percent of the index, a manager of a Belgium fund is therefore forced to deviate from the index.

Those who comply with the diversification rules can invest a maximum of 56 percent of their fund in the Bel20, according to Value Square. This means that fund managers have to fish largely outside the Bel20 pond. And that's where the fish turned out to be much larger in recent years. The Belmid index, which bundles 30 Belgian stocks with a medium market value, recorded a return of 13.8 percent in 2023, including dividends. The index will also achieve a return of 10.2 percent per year over five years, compared to 4.9 percent for the Bel20 return index.

Heavyweights

The dispersion rules can also be at a disadvantage, for example when Bel20 heavyweights perform excellently. In 2017, no Belgian fund did better than the Bel20 because, due to the diversification rules, administrators were not able to take sufficient advantage of the good performance of heavyweights ING, KBC and Engie.

The performance of heavyweights also plays a role in France, Germany and Italy, although that impact is less pronounced because the star indexes in those countries have 40 stocks instead of 20. However, administrators also invoke the argument to explain why they have fallen below the bar in recent years. While the Bel20 had a lousy 2023, the Italian FTSE MIB index climbed to a 15-year high last year. In France, CAC40 heavyweights L'Oréal and Hermès have done very well in recent years. “For most managers, the weights of those stocks in the funds were much lower than those in the CAC40,” says Damien Lanternier, fund manager of the DNCA fund Centifolia.

Catch-up movement

According to the fund managers, it is impossible to predict whether the Brussels stock exchange will catch up after a bad 2023. “The fact is that there are still a lot of profitable and cheap companies listed on the Brussels stock exchange,” says Millecam. Van Quaethem also thinks the same way. “Due to the increasing disinterest in their own market, investors are blind to various innovative companies that play a leading role in their market niches. Moreover, most Belgian companies have strong balance sheets. '

According to KBC Asset Management, there are two options. “Either, the 2023 stock market recovery will spread to sectors other than technology, and we will have a global cyclical recovery. Then stragglers like the Bel20 can be picked up. In other words, and that is our baseline scenario, we will have a limited growth of 0.5 percent in the euro zone by 2024, in which case investors will focus on both defensive companies and “quality companies”. Then it doesn't seem so likely that the Bel20 will outperform,” it reads.

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'Change in mentality needed to breathe new life into the Brussels bourse'

The decline in the Brussels stock exchange has occurred at all levels in recent years: fewer listed companies, less analyst follow-up, less investor interest and fewer funds that focus on Belgian stocks.

The number of Belgian funds fell from 52 in 1999 to barely 7 today. In the past two years alone, another 6 funds disappeared. “A change in mentality is needed, especially among Belgian politicians. They don't like stocks,” it sounds in unison at the fund houses. “Few Belgian politicians invest in stocks and those who stand out are - like other investors - scolded for speculators,” says Patrick Millecam of Value Square. According to the manager, legislative and political incentives are also needed to convince unlisted companies to come public.

But companies and investors also need a different mentality, says Danny Van Quaethem, fund manager at Econopolis. “Belgians apparently have a very difficult time dealing with the typical equity risk. The Scandinavian countries show how to do it. The population actively invests in its own stocks and the entrepreneurial class is open to listing on the stock exchange. In our country, many entrepreneurs turn a blind eye to the stock market. However, a few family-listed companies show that transparency and family, sustainable long-term management are perfectly reconcilable. '

Source

The Time: Belgian fund managers clock higher than Bel20

Author: Peter Van Maldegem

Date: 12/01/2024

Picture: Filip Ysenbaert