The recent turbulent markets around Europe have provided an object lesson in how well fund managers deal with adverse conditions, according to Standard & Poor's Fund Services' latest update on the sector.

The report explains why S&P Fund Services pays special attention to fund managers' behaviour when markets undergo periods of major turmoil, according to S&P Fund Services' lead fund analyst Alison Cratchley.

Most of the fund managers surveyed maintained a defensive positioning in the three months to the end of October 2008 but came unstuck, partly because they were not quite defensive enough and partly because of poor timing.

One such instance is the S&P AA rated SVM Funds - Continental Europe Fund, where manager Hugh Cuthbert maintained cautious and defensive positioning but bought selectively in depressed areas such as financials, where he thought the bad news was already factored in. These purchases proved premature.

Zero-weighting or underweighting Volkswagen damaged the performance of all the Germany funds covered in the S&P Fund Services update. The share price shot up after Porsche revealed it had built up a secret stake in VW, which briefly became the largest company in the world as a result of a vicious short squeeze on a small free float.

At the S&P A rated Aviva Investors - European Equity Fund, not owning VW cost 220bps relative to the benchmark.

'Overall, the three months to the end of October 2008 were grim for investors in European equity funds,' says Cratchley, explaining that the median pan-Europe fund lost 23.4 per cent, bringing its year to date loss to 39.1 per cent.

Small-cap investors fared even worse, with the median pan-European smaller companies fund losing 30.8 per cent, bringing its year to date loss to 45 per cent.

All the managers interviewed for S&P Fund Services' update expect a deep and prolonged recession and most are cautious on the European economic outlook. However, some managers have begun to see the market as cheap at current levels.

John Surplice and Martin Walker, who manage the S&P AA rated Invesco Funds - Pan European Equity Fund, note that the current multiple for the overall market is around eight times 2009 earnings or 8.5 times excluding financials.

Factoring in further earnings cuts gives a multiple of ten times earnings for the market ex financials, which could be seen as an attractive long-term average.

They point out that the forced de-leveraging by investors has led to such dramatic falls in financial markets that many high quality companies with strong balance sheets and relatively good earnings visibility are now trading on unprecedented low multiples.