13th March 2014
Europe has never been far from the news in recent years, and that has brought investors in European stock markets their fair share of volatility. Investment journalist Cherry Reynard looks at the issues. That said, there plenty of countries in Europe that are not part of the Eurozone where economic growth has followed a different pattern – Switzerland or Finland, for example. Even within the Eurozone, there have been plenty of global companies that have managed to transcend the domestic problems.
Europe has broad and diverse equity markets, with some of the world’s most recognisable companies – L’Oreal, Nestle, BMW. Funds investing in European companies will be found in the IMA Europe ex UK, Europe inc. UK and European Smaller Companies sectors. There are also a number of strong investment trusts – in the Association of Investment Companies Europe sector – and a number of Eastern European specialist funds.
What are the range of fund strategies within the sector?
European stock markets have tended to attract some of the strongest fund managers in the business. There are a number of household names – Richard Pease and Mark Barnett at Henderson, Alexander Darwall at Jupiter, Alistair Hibbert at BlackRock and David Dudding at Threadneedle – who have proved consistent long-term stewards of investors’ money.
But within these, there are a number of different approaches. Darwall at Jupiter, for example, takes a very long-term approach, identifying the best sustainable growth companies. His fund is concentrated and high conviction, tending to focus on high quality companies. Hibbert at BlackRock has proved more volatile, but his high growth approach will tend to perform extremely well when market are climbing. Dudding in turn describes himself as a pragmatist, investing in quality companies that are growing their businesses and earnings over the long term.
Managers will also vary in the extent to which they are willing to take a chance on the Eurozone’s peripheral countries, and their holdings in small and mid-cap companies. Also, some managers like to stick close to the index weightings in certain companies.
If, for example, Nestle represents 7% of the index, some managers may only want to vary their position by 2-3% from there. The indices used are usually the MSCI Europe, or Dow Jones Eurostoxx indices.
Increasingly there are also a number of income funds available, specialising in European companies. These will target dividend paying European companies, which will tend to give the funds a defensive bias. Some ‘enhanced’ income funds use derivatives to enhance the income on the fund, but investors may sacrifice some of capital growth to receive this higher income.
Over the past five years, the average fund in the Europe ex UK sector has grown by 87.9% and in the European Smaller Companies sector by 143.9% (to 6th February). This compares to average growth from the UK Equity Income sector of 97.8%, and from the Global sector of 75.9%. European markets rallied strongly in 2013 as investors re-examined European companies markets in light of the actions of central bankers to address the credit crisis. However, European markets have been volatile, buffeted by the actions of policymakers. There has also been a significant gap between different markets – Germany has significantly outperformed Greece, for example.
As in other equity markets, the strongest funds have tended to have a bias to smaller companies and/or high quality growth companies. At a time when economic growth is scarce, companies that can grow their earnings whatever the prevailing climate have become highly prized. Smaller companies have done well partly because they were coming from a low base, having been sold off during the credit crisis, but also because a number of smaller companies have proved themselves adaptable to the new economic conditions.
When does the sector perform well/badly?
Europe tends to be a ‘cyclical’ market – one that does well in a climate of rising global growth. It will tend to sell off significantly during times of economic weakness and then recover strongly as growth picks up. This means it can be very profitable for investors, or a quick way to lose a lot of money depending on whether an investor gets the timing right. More recently the European stock markets have been particularly vulnerable to the pronouncements and actions of central bankers, as they have tried to find a solution to the debt crisis. This has also created volatility.
What sort of investor does it suit?
During the credit crisis, investors fell out of love with European shares. They returned to the market in 2012 and 2013, but tended to focus on the highly quality companies, with predictable earnings. There was some recovery in more economically sensitive companies in the second half of 2013, but even now, European stock markets look relatively cheap compared to other developed stock markets. Investors must be willing to take risk, and bear some volatility, but European equity markets generally do well as growth improves, as is the environment at the moment.
How much of a portfolio for low/mid/high risk investor?
The Eurozone in aggregate is equivalent to the largest country in the world. It has some well-recognised global companies and investors can choose a high risk approach – say, using a smaller companies fund – or a lower risk approach with a manager specialising in high quality blue chips or income stocks. Equally, investors can choose a manager that only invests in ‘mainstream’ Europe – Germany, France and Switzerland, for example – or one that explores peripheral European countries – Eastern Europe, Greece, Italy, Portugal or Ireland, for example. As such, it is market that offers investors a lot of choice.
Top 10 by performance (5 year) – IMA Europe ex UK
Invesco Perp European Opportunities
FF&P European All Cap Equity
BlackRock European Dynamic
Scot Wid HIFML European Focus
Jupiter European Inc
J Chahine Digital Stars Europe Ex UK
Baillie Gifford European
Scot Wid HIFML European Strategic
Threadneedle European Select Ret
BlackRock Continental European
Questions investors should ask themselves
Is the fund hedged back into sterling?
What is the manager’s style?
Is it run with a value or growth approach?
Has it proved defensive in weaker markets?
How similar is it to the index?
Does it have an income mandate?
Adviser comments and fund suggestions
James Calder, head of research, City Asset Management,
“It could be argued that Europe is still a basket case, but we increased our weighting in the third quarter of last year. Things certainly aren’t getting any worse and some companies have emerged in better shape.”
JPM Europe ex UK Dynamic
Ignis European Smaller Companies
Darius McDermott, managing director, Chelsea Financial Services
“There is low to negative GDP growth in the area as a whole. It is still a cheap developed equity market, but not as cheap as it was. Nevertheless, there are some world class companies in Europe, which produce products and services for parts of the world with stronger economic growth.”
Blackrock Continental Europe