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Europe: why now could be a good time to invest

Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice. Once held in a SIPP money is not usually accessible until age 55 (rising to 57 in 2028).


Dominic Rowles

Investment Analyst

Five factors in investors’ favour when investing on the continent

Analyst Dominic Rowles sets out a compelling case for investing in Europe.

European markets have been dogged by negative sentiment over the past few years. The crisis over government debt levels, political uncertainty and questions over the future of the single currency all led UK investors to shun the continent.

But recently the signs have become much more promising, and we think there are five reasons to consider an investment in Europe at present.

Companies are making more money

In the end, rising share prices are driven by long-term growth in companies’ earnings. In the first half of 2017, European companies posted remarkably strong earnings results, with the majority exceeding analyst expectations.

These positive earnings surprises have driven a strong recent performance from Europe’s stock market, which is up more than 25% over the past twelve months with dividends reinvested (Source: Lipper IM to 31/08/17). As ever please bear in mind that past performance isn’t a guide to future returns.

European stocks look good value

Despite recent strength, if you’re considering making an investment in Europe now, we don’t think you’ve missed the boat.

We measure the value of stock markets using the cyclically adjusted price to earnings (or ‘CAPE’) ratio. This tells us that European shares are still trading well below their long-term average valuations, which bodes well for the future.

History shows that investing when valuations are low has given the best chance of success. However, there are no guarantees and it’s impossible to rule out market falls.

Three funds for exposure to Europe

The European economy is back on a strong footing

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Watch: Heather Ferguson asks Richard Pease to lift the lid on his investment approach.

Five years on from European Central Bank chief Mario Draghi’s pledge to “do whatever it takes” to save the euro, it’s clear he was true to his word. A series of extraordinary measures to support governments and banks have restored financial stability and put the economy on a strong footing.

The economic picture for many European countries is getting brighter, and the euro zone has grown twice as fast as the UK in recent months. Lending to companies and individuals has picked up, supporting growth. Unemployment is at an eight-year low and inflation looks under control.

All this should provide a supportive economic backdrop for European companies to thrive. There are some risks as the central bank looks to remove its stimulus measures, but Mr Draghi will be well aware of the danger in raising interest rates too soon.

Developed world annual economic growth rates (%)

Source: Trading economics, Sep 2017

Investor sentiment is improving

At the start of the year political uncertainty cast a large shadow over Europe, with a number of crucial elections on the horizon. However, following Emmanuel Macron’s victory in France and the rejection of anti-EU parties, investor sentiment towards Europe has enjoyed a dramatic resurgence. Private investors are now more confident about Europe than the UK, and some institutional investors are reallocating funds from the US to Europe.

HL Investor Confidence Index - European shares (three-month average)

Source: HL, October 2016 - September 2017

While some uncertainty is inevitable, we believe investors should look beyond short-term issues and recognise that companies can thrive regardless of political concerns. Europe is home to a vast array of businesses, ranging from world-leading juggernauts like Siemens, BMW and Nestlé, to dynamic smaller companies vying to be the market giants of tomorrow.

Quality fund managers

Europe comprises 50 nations, each with its own culture, political system, and economic strengths and weaknesses. We see this diversity as a distinct advantage for investors and believe most portfolios should feature at least some exposure to the region.

It’s the hunting ground for a number of exceptional stock pickers with a long history of identifying some of the continent’s most profitable investment opportunities. Recent analysis of the Wealth 150 list of our favourite funds highlighted Europe as an area where we have been particularly good at identifying outstanding fund managers.

Three funds for exposure to Europe

Kate Marshall

Investment Analyst

Investment idea

FP CRUX European Special Situations

  • Managed by one of Europe’s finest stock pickers
  • Richard Pease seeks specialist companies with barriers to competition

Europe has had plenty to contend with in recent years, with ongoing economic and political uncertainties. More recently the continent’s economic recovery appears to be making some headway and this has piqued investors’ interest in the region.

It’s easy to forget, however, that the prospects for economic growth and those for individual companies are not one and the same.

Many businesses are built to thrive whatever the economic weather, and fund manager Richard Pease has built a distinguished career identifying them. In contrast, he aims to avoid those that are more sensitive to fluctuations in the economic cycle.

This preference for so-called ‘defensive’ companies leads him to favour those which sell their products or services globally. These firms aren’t as reliant on the spending power of domestic consumers for their revenues.

Businesses with a unique or superior product are also favoured. Their customers are less likely to switch to competitors as they fear ending up with an inferior product. He also has the freedom to invest in smaller and mid-sized companies where he feels the potential returns justify the higher risks involved.

Richard Pease has used the same strategy when investing in Europe to great effect for many years. Our analysis suggests he has one of the strongest stock-picking records in the sector and has added value regardless of the sectors and countries he invests in.

He currently applies his trade to the FP CRUX European Special Situations Fund, on which he has built an exceptional track record. The fund has delivered growth of 184.1% since launch, compared with just 98.6%* for the wider European stock market. As always please remember past performance isn’t a guide to future returns. Like all stock market investments the fund can fall as well as rise in value, so you could lose money.

We view the fund as an excellent option for investors seeking a single manager to access Europe’s diverse stock markets.

FP CRUX European Special Situations - performance since launch

Past performance is not a guide to future returns

Source: *Lipper IM, 30/09/09 - 31/08/17

Annual % growth August 12-13 August 13-14 August 14-15 August 15-16 August 16-17
FP CRUX European Special Situations 32.7 4.7 7.6 27.1 21.9
FTSE World Europe ex UK 26.3 10.4 1.3 15.4 26.0

Fund information

Investment goal: Growth
Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.87% p.a.
Ongoing saving from HL: 0.14% p.a.*
Net ongoing charge: 0.73% p.a.
Vantage service charge: 0.45% p.a.
Maximum overall charge: 1.18% p.a.

* This saving is delivered via a loyalty bonus, which may be subject to tax outside an ISA or SIPP.

View Key Investor Information Document

View our charges

FP CRUX European Special Situations

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Three European shares popular with professional investors


Heather Ferguson

Investment Analyst

Investment idea

HL Multi-Manager European

  • A ready-made portfolio of some of the best European funds
  • Provides diversification across different yet complementary fund management styles
  • Underlying fund selection and monitoring is taken care of by our expert team

Our investment team is passionate about uncovering the most skilled fund managers.

They do this because the best fund managers should be able to add the most value for investors over the long term.

Our meticulous research has highlighted a number of outstanding stock pickers investing in Europe – Richard Pease being an excellent example.

Yet fund managers operating in the same sector will still have different approaches and areas of expertise. This means their funds won’t all perform in the same way.

While the European sector features some of the UK’s finest fund managers, many investors struggle to choose which to entrust their hard-earned capital to. The HL Multi-Manager European Fund aims to provide a solution and take the hassle away – it invests in what our team believe are the very best European funds, combining them into a single investment. This portfolio is then monitored on investors’ behalf and changes are made as and when our managers feel it’s necessary.

In addition to Richard Pease, the portfolio currently invests with a number of other experienced managers with varying investment styles, including Alexander Darwall at Jupiter and Chris Rice at Sanditon. It covers companies of all sizes, from large multinationals to higher-risk smaller businesses.

We think the results more than justify the extra costs associated with a multi-manager approach, and so far the strategy has yielded superior returns for investors, although this is not a guide to how it will perform in future.

The fund is run by our sister company HL Fund Managers Ltd.

HL Multi-Manager European portfolio breakdown

Correct as at 31/07/2017. Please note figures may not add up to 100% due to rounding.

Annual % growth August 12-13 August 13-14 August 14-15 August 15-16 August 16-17
HL Multi-Manager European n/a* n/a* n/a* 19.9 21.2
FTSE World Europe ex UK 26.3 10.4 1.3 15.4 26.0

*Full year performance not available

Past performance is not a guide to future returns

Source: Lipper IM to 31/08/2017

Fund information

Investment goal: Growth
Net initial charge: 0.00%
Ongoing charge (OCF/TER): 1.49% p.a.
Ongoing saving from HL: 0.00% p.a.
Net ongoing charge: 1.49% p.a.
Vantage service charge: 0.45% p.a.
Maximum overall charge: 1.94% p.a.

View Fund Key Features

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Richard Troue

Head of Investment Analysis

Investment idea

Legal & General European Index

  • A low-cost way to invest in the continent
  • Fund aims to track the performance of the FTSE World Europe ex UK Index

Investors seeking a straightforward way to access a broad range of companies from across the continent, or who favour a passive option, could consider the Legal & General European Index Fund.

It aims to track the performance of the FTSE World Europe ex UK Index by investing in around 500 companies in countries from France and Germany to Denmark and Poland.

The fund has an exceptionally low ongoing charge of 0.09%, which we feel is significant given charges are a key determinant of tracker fund performance. The Vantage service charge of up to 0.45% p.a. also applies.

Over the past ten years the fund has grown 76.5%^, although please remember past performance is not a guide to future returns.

Annual % growth August 12-13 August 13-14 August 14-15 August 15-16 August 16-17
Legal & General European Index 26.5 9.0 0.2 14.4 24.0
FTSE World Europe ex UK 26.3 10.4 1.3 15.4 26.0

Past performance is not a guide to future returns

Source: ^Lipper IM to 31/08/2017

Fund information

Investment goal: Growth
Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.12% p.a.
Ongoing saving from HL: 0.03% p.a.
Net ongoing charge: 0.09% p.a.
Vantage service charge: 0.45% p.a.
Maximum overall charge: 0.54% p.a.

View Key Investor Information Document

View our charges

Invest in Legal & General European Index

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George Salmon

Equity Analyst

Three European shares popular with professional investors

Why these three companies have caught the eye of Europe’s most talented fund managers.

Over the years we’ve found some seriously good stock pickers investing in Europe.

The very best feature on our Wealth 150 list, which is currently home to seven European funds – including the FP CRUX European Special Situations Fund featured on these pages.

To get a feel for the characteristics these investors look for in a stock, we’ve crunched the numbers to discover the three most widely held companies among the seven funds. Below, I take a look at the stocks and explain why they have found favour among those who invest for a living. Like all stock market investments, their shares will fall as well as rise so investors could make a loss. Any yields quoted are variable and not a reliable indicator of future income.

Ryanair

Ryanair

Ryanair’s come a long way since it first took to the skies in 1985.

Back then, its 15-seater Bandeirante aircraft were so small it had to impose a 5’2” height limit on its cabin crew. Today, it’s Europe’s number one airline, carrying 130m customers to more than 200 destinations every year. 170 new routes are due to be added this winter too.

Airlines have a reputation among investors for underwhelming returns. So it’s somewhat surprising to see one proving so popular with fund managers - especially so given the intensifying competition in European airspace.

However, even long-time sceptic Warren Buffett has recently bought in to four American airlines, suggesting something fundamental could be changing in the industry.

So what’s attracting our favourite European fund managers to the shares?

A quick glance at some key metrics across the sector gives us a clue. Ryanair has the highest operating margins of its major peers, while its return on capital employed of 15.4% stacks up pretty well too.

With low-cost rivals like easyJet and Wizz also adding capacity, the group’s bread and butter short-haul flights are facing increased competition. But Ryanair has a clear advantage on costs, with industry-leading fleet costs and ticket prices. Ryanair has also locked in a significant portion of its fuel costs at under $50 per barrel for the next couple of years.

Perhaps because of boss Michael O’Leary’s notoriously outspoken nature, Ryanair has a habit of hitting the headlines for the wrong reasons. Recent news that a problem with planning its pilots’ annual leave means 40-50 flights a day will need to be cancelled is the latest example. While clearly disruptive for passengers, this represents less than 2% of Ryanair’s flights, and we don’t think the investment case is affected.

That said, investors should remember that air travel is a cyclical business, so a bumpy Brexit has the potential to generate some near-term turbulence.

At present, Ryanair doesn’t pay a dividend, but its €600m share buyback plan confirms that management have shareholder returns in mind.

View our Ryanair factsheet

Bayer

CVS Group

German multinational Bayer’s €46.8bn of sales stretch from pharmaceuticals and consumer healthcare to crop science and animal health.

It also has a 64% stake in plastics manufacturer Covestro, with global sales of €11.8bn. It will be even bigger soon, as it looks to complete a $66bn deal for US agrichemicals group Monsanto.

It’s innovation and technology which link the company’s various operations. Bayer has spent €18.9bn on research and development in the last five years, and employs over 15,000 R&D staff worldwide. A combination of cutting-edge research and dominant market positions have helped maintain a healthy profit margin in excess of 20%.

Bayer is dominated by its pharmaceuticals business. Accounting for the bulk of sales and majority of profits, the drug portfolio is fairly concentrated, with the top four drugs accounting for almost half of revenues. Unfortunately, three of those four will have lost patent protection by the mid-2020s, when they will face competition from cheaper, generic versions.

Bayer - sales by division (€m)

Source: Bayer AG 2016 Annual Report

Bayer hasn’t stood still though, with 17 late-stage trials underway at the end of last year. Investors will be hoping for positive results but, as is always the case with pharmaceuticals, trials can fall at the final hurdle.

Uncertainty over the pharmaceutical business probably goes some way to explain the ambitious Monsanto bid. The deal would make Bayer the world’s largest supplier of seeds and crop chemicals. It’s a less volatile business and the steadier income stream should help underpin a dividend which has grown steadily since 2003. The shares currently offer a prospective yield of 2.7%

Mega-mergers are never straightforward though. The deal has yet to receive all the necessary regulatory approvals and even it does, integration on this scale brings risks.

View our Bayer factsheet

Novo Nordisk

CVS Group

Novo Nordisk is the product of two Danish pharmaceuticals businesses set up to produce insulin shortly after its discovery in the 1920s. Almost a century later, insulin remains a central element of the business, with diabetes treatments accounting for 81% of sales in the first half of this year.

But competition has intensified, and 2016 was a tough year for the group as conditions in its important North American market worsened. Consolidation among Novo Nordisk’s US customers, has meant fewer, larger buyers who are better able to squeeze prices.

US sales have continued to grow, but growth expectations are now lower, and this has hit the share price.

Novo Nordisk - dividends per share (Danish krone)

Past performance is not a guide to future returns

Source: Bloomberg, 1995-2016

Yet Novo’s strong market position in diabetes is likely to prove a long-term positive. Diabetes is an increasingly common disease, with the number of sufferers rising from 108m in 1980 to 422m in 2014. Prevalence has increased from 4.7% of adults in 1980 to 8.5% today, boosted by rapidly rising rates in developing countries.

Steadily increasing demand has already yielded results for shareholders, with 20 years of successive dividend growth, although of course there’s no guarantee that will continue. The prospective yield is currently 2.8%.

View our Novo Nordisk factsheet

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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