The Franklin Templeton European Equities Fund's management team believes common stocks are undervalued and distressed debt is worth investing in.
It is an approach that fared well for the fund last year as it returned 18.3per cent compared to a sector average of 10.7per cent. The year was a tale of two halves, according to lead fund manager Philippe Brugere-Trelat.
Equities generally enjoyed a strong first half last year, driven by solid economic data, ample liquidity, and sustained mergers and acquisitions across a number of sectors.
In the second half, however, the emergence of a credit crunch, triggered by the United States subprime crisis, brought a quick end to the pervasive feeling of optimism, if not complacency, that characterised previous months.
'A sudden drop of confidence and liquidity led to significant turmoil in global financial markets, which was stabilised following massive interventions by the major central banks, including the European Central Bank,' Mr Brugere-Trelat said. 'Although not the root of the crisis, European equities suffered from volatility brought about by uncertainty, particularly in the region's financial sector. A surge in the value of the main European currencies relative to the US dollar, particularly the euro, as well as a rise in global energy and input costs provided an added dimension to the newfound pessimism affecting European equity investors.'
The fund's overall exposure to the European financial sector had a negative impact during the year, but being underweighted in the sector throughout the period relative to the benchmark index proved helpful.