Belgian fund managers clock higher than Bel20

The increasing success of passive index funds or trackers is largely due to the shortcomings of actively managed funds. After fees, the majority of those funds typically fail to outperform the market, pushing investors toward cheaper index products.

Not so on the Brussels Stock Exchange, where active fund managers do seem to be succeeding in their objective. In 2023, five of the seven actively managed funds outperformed the only tracker tracking the Brussels stock market, the Amundi Bel20 UCITS ETF. The best performers were Antwerp-based asset manager Econopolis and Ghent-based Value Square.

These are not coincidentally two fund houses that swam against the tide a few years ago and created a Belgium fund because they saw opportunities in an increasingly thinly populated Brussels stock market. Both managers achieved a return of rounded 6.8 percent after fees with their fund last year, 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. 'For example, last year we took profits relatively quickly on some sharply rising values such as Melexis and X-Fab,' says Danny Van Quaethem, fund manager of Econopolis Belgian Champions.

'We also made a good 'negative' selection. We were deliberately strongly underweight all year in financials, including holdings, and in real estate. We also placed relatively high positions in strong small caps(companies with a smaller market capitalization, ed.), 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 quoted at a historically low level,' says Van Quaethem.

Patrick Millecam, manager at Value Square and focused on Belgian equities for 30 years, emphasizes the fund's investment philosophy, from which it does not deviate. 'Our focus is on companies with good long-term prospects, that are cheap and that have the momentum along with them. In 2023, X-Fab, Van de Velde, Jensen Group and EVS, among others, clearly contributed. EVS benefited from the entry of big-tech players into the live sports events sector. 'Furthermore, the split 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, Value Square's fund also benefits from its low costs.

Things fared less well for KBC Equity Flanders, which underperformed the Bel20 tracker in 2023 with a return of 1.4 percent. 'Certain large positions such as Recticel and Azelis had a strong negative impact. However, we remain confident about value creation at those companies over the medium term. We also noted that strong operational performance in 2023 was not always rewarded. We are thinking here of D'Ieteren, which posted a meager return of 0.5%,' says KBC Asset Management.

Over the longer term, the KBC fund's track record does look good. Over a five-year period, KBC Equity Flanders is actually the best-performing fund with an average return of 9.2 percent per year. Over that period, all Belgium funds outperform the Bel20 tracker. The average annualized return of the Belgium funds over the past five years was 6.9 percent, significantly better than the tracker's 4.3 percent. The 10-year report is also perfect. The funds averaged 6.1 percent annually, compared with an annualized return of 3.7 percent for the index fund.

Small but fine

That the Brussels stock market seems easier to beat than many other equity markets has much to do with the limited market capitalization and lack of liquidity of the shares listed there. For 7 of the 20 Bel20 shares, 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 managing portfolios worth billions.

A corollary is that Belgian stocks are also followed by fewer analysts, increasing the likelihood of market inefficiencies. That provides an excellent playground for active managers.

That it is harder to beat the market in more liquid and tracked markets is evident. We examined the performance of country funds in some major euro zone countries, comparing them to a tracker on their main stock market index. Results: in both France, Germany and Italy, no fund outperformed the tracker, either in 2023 or over a five-year period. In the three countries, both the average market capitalization, the average volume traded and the number of analysts tracking 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 could count less on the coincidence factor provoked by diversification rules. Funds are legally allowed to invest a maximum of 10 percent in a single stock, and holdings between 5 and 10 percent cannot together represent more than 40 percent of the fund. In a very concentrated index like the Bel20, where the ten largest stocks take up almost 80 percent of the index, this forces a manager of a Belgium fund to deviate from the index.

Those who observe the diversification rules can invest a maximum of 56 percent of their fund in the Bel20, Value Square calculated. That means fund managers have to fish outside the Bel20 pond to a considerable extent. And there the fish proved much bigger in recent years. The BelMid index, which comprises 30 Belgian stocks with medium market capitalization, posted a return of 13.8 percent, including dividends, in 2023. Also over five years, the index achieved a return of 10.2 percent per year, compared with 4.9 percent for the Bel20 return index.

Heavyweights

Diversification rules can also play to the disadvantage, for example, when Bel20 heavyweights perform excellently. In 2017, no Belgium fund outperformed the Bel20 because diversification rules did not allow managers to take sufficient advantage of the good performance of heavyweights ING, KBC and Engie at the time.

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 rather than 20 stocks. Still, managers also invoke the argument to explain why they have underperformed in recent years. While the Bel20 had a lousy 2023, Italy's FTSE MIB index climbed to its highest level in 15 years last year. In France, CAC40 heavyweights L'Oréal and Hermès did extremely well in recent years. 'The weights of those stocks in the funds were much lower than those in the CAC40 at most managers,' says Damien Lanternier, fund manager of the DNCA's Centifolia fund.

Catch-up

Whether the Brussels stock market will catch up after a bad 2023 is impossible to predict, according to fund managers. "The fact is that there are still a lot of profitable and low-cost companies listed on the Brussels stock exchange," Millecam said. Van Quaethem also thinks so. 'Due to the increasing disinterest in their own market, investors are blind to several 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 possibilities. 'Either the 2023 stock market recovery extends towards sectors other than technology, and we get a global cyclical recovery. Then laggards like the Bel20 can be picked up. Alternatively, and this is our base case, we get limited growth of 0.5 percent in the Eurozone in 2024. In that case, investors will focus on defensive companies as well as "quality" companies. Then it does not seem so likely that the Bel20 will outperform,' it reads.

‍

'Mentality change needed to revitalize Brussels stock market'

The impoverishment of the Brussels stock market has manifested itself at all levels in recent years: fewer listed companies, less analyst follow-up, less investor interest and also fewer funds focusing on Belgian stocks.

The number of Belgium funds fell from 52 in 1999 to barely 7 today. In the past two years alone, 6 more funds have disappeared. 'A change in mentality is needed, especially among Belgian politicians. They don't care for shares,' is the chorus among the fund houses. 'Few Belgian politicians invest in shares and those who come out for it are called speculators, just like other investors,' says Patrick Millecam of Value Square. According to the manager, incentives from legislation and politics are also needed to convince unlisted companies to go public.

But a different mindset is also needed among companies and investors, says Danny Van Quaethem, fund manager at Econopolis. 'Belgians apparently have a very hard time dealing with typical equity risk. The Scandinavian countries show how to do it. The population actively invests in their own shares and the entrepreneurial class is open to a stock market listing. In our country, many entrepreneurs turn their nose up at the stock market. However, a few family-run listed companies show that transparency and family-style, sustainable long-term management are perfectly reconcilable.

Source

De Tijd: Belgian fund managers clock higher than Bel20

Author: Peter Van Maldegem

Date: 12/01/2024

Image: Filip Ysenbaert