Interactive Investor

Why we’ve bought this sector-leading fund

9th January 2023 14:17

Douglas Chadwick from ii contributor

Saltydog Investor seeks to capitalise on an excellent few months for European shares with a new fund purchase.  

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Although nearly all the major stock markets around the world rose in the final quarter of last year, they had a disappointing December.

The FTSE 100 and FTSE 250 both ended the month down 1.6% - and they did better than most. In mainland Europe, the German DAX fell by 3.3% and the French CAC 40 lost 3.9%. It was worse in the US where the Dow Jones Industrial Average dropped by 4.2%, the S&P 500 went down by 5.9%, and the Nasdaq fell by 8.7%.

The Hong Kong Hang Seng bucked the trend, returning 6.4%, but other Asian indices did not do so well. The Shanghai Composite dropped 2%, the Indian Sensex lost 3.6%, and the Japanese Nikkei 225 fell 6.7%. The Brazilian Ibovespa, which is one of the few indices that went up in 2022, fell by 2.4% in December.

Stock market indices

Index1 Jan to 31 March1 April to 30 June1 July to 30 SeptOct 2022Nov 2022Dec 20222022 Full Year2023 1 to 7 Jan
FTSE 1001.8%-4.6%-3.8%2.9%6.7%-1.6%0.9%3.3%
FTSE 250-9.9%-11.8%-8.0%4.2%7.1%-1.6%-19.7%3.5%
Dow Jones Ind Ave-4.6%-11.3%-6.7%14.0%5.7%-4.2%-8.8%1.5%
S&P 500-4.9%-16.4%-5.3%8.0%5.4%-5.9%-19.4%1.4%
Nikkei 225-3.4%-5.1%-1.7%6.4%1.4%-6.7%-9.4%-0.5%
Hang Seng-6.0%-0.6%-21.2%-14.7%26.6%6.4%-15.5%6.1%
Shanghai Composite-10.6%4.5%-11.0%-4.3%8.9%-2.0%-15.1%2.2%

Data source: Morningstar

Fortunately, the first week of 2023 looks more encouraging.

In the UK, the FTSE 100 has gone up by 3.3% and the FTSE 250 has made 3.5%. The German and French markets have done even better, the DAX is up 4.9% and the CAC 40 has gained 6.0%.

Funds investing in Europe fall into three of the Investment Association (IA) sectors: Europe including UK, Europe excluding UK, and European Smaller Companies. Funds from these sectors feature at the top of our 2022 fourth-quarter performance analysis. Eight of the top 20 funds come from the Europe excluding UK sector, one is from the Europe including UK sector, and five are from the European Smaller Companies sector. The Barings German Growth fund is in the Specialist sector, and the remaining five funds come from the UK All Companies sector.

Top 20 funds in Q4 2022

Fund nameInvestment Association (IA) sector% Return
Oct 2022Nov 2022Dec 2022Q4
LF Brook Continental EuropeanEurope Excluding UK8.78.32.420.6
Schroder European RecoveryEurope Excluding UK9.28.31.820.3
LF Lightman EuropeanEurope Excluding UK6.38.23.318.9
Janus Henderson European Smaller CompaniesEuropean Smaller Companies6.78.02.718.3
M&G European Sustain Paris AlignedEurope Including UK6.18.32.918.3
Invesco European Smlr ComsEuropean Smaller Companies5.58.13.518.0
Artemis SmartGARP European EquityEurope Excluding UK8.75.62.617.7
Schroder UK Mid 250UK All Companies7.210.2-1.116.9
EdenTree Responsible and Sust EurpEurope Excluding UK6.76.12.816.3
Premier Miton UK Value OppsUK All Companies5.79.30.315.9
Liontrust European DynamicEurope Excluding UK6.
Jupiter Europe (ex UK) Small CompaniesEuropean Smaller Companies3.58.43.315.8
Artemis UK SelectUK All Companies5.99.8-0.515.7
abrdn European Smaller CompaniesEuropean Smaller Companies4.28.42.315.7
Invesco European EquityEurope Excluding UK7.07.20.815.6
Jupiter European Smaller ComsEuropean Smaller Companies3.
L&G Future World Sustainable European Equity FocusEurope Excluding UK4.48.71.915.6
Aviva Investors UK Lstd Small & Mid CapUK All Companies5.99.6-0.615.5
Barings German GrowthSpecialist6.68.2-0.115.2
FTF Martin Currie UK Mid CapUK All Companies7.28.4-0.815.2

Data source: Morningstar

On the whole, these funds performed particularly well in October and November, but dropped in value at the beginning of December. Performance then picked up at the end of the year and they have had a good start to 2023.

We have not finished doing our sector analysis for last year yet, but I know that it is not going to look good. I am expecting nearly all sectors to have made losses and most will be down by double-digit percentage returns.

For most of last year, both of our demonstration portfolios were holding significant amounts of cash. At the end of December, the Tugboat, our most cautious portfolio, had 90% in cash or money market funds, and in the more adventurous Ocean Liner that figure only dropped to 80%.

With the small amount that we do have invested, we are still looking for the leading funds in the best-performing sectors. In November, we noticed that the European funds were starting to look interesting and invested in the Man GLG Continental Eurp Growth fund.

It did not make it into our top 20 in quarter four but is already showing a gain of 3.5% in 2023. Last week we decided to increase our exposure to the European sectors and invested in the M&G European Sustain Paris Aligned fund.

Hopefully this year we will see more sectors start to recover and be able to put our cash reserves to good use. 

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