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Europe

European sector

The economic backdrop has been poor in Europe for a number of years, yet the continent is home to many successful businesses.

Kate Marshall - Investment Analyst
01 January 2017

Often viewed as a homogenous region, Europe is in fact a disparate area – politically, economically, and culturally. Far from seeing this as a negative, we believe it should be viewed as a huge source of opportunity. Europe comprises a variety of countries – from Norway and Sweden located in Northern Europe to Spain and Italy in the South – each with their own success stories.

  • Europe has had its fair share of problems in recent years and challenges remain. Political and economic uncertainty continued throughout 2016 as the UK voted to leave the European Union and Italy rejected constitutional reform, while 2017 will see a raft of national elections across the continent.
  • Despite the poor economic outlook, we believe there are reasons to be positive. The continent is home to many successful, internationally-competitive businesses generating global earnings. Our analysis also suggests European stock markets continue to represent good value.
  • The sector features many high-calibre fund managers with successful track records. The majority focus on larger companies, although some will invest in higher-risk small and medium-sized companies. Most typically focus on growing capital, although there are an increasing number of funds in the sector in search of income opportunities.

Our view on the Europe sector

Europe has certainly had its fair share of problems in recent years as investors have continued to grapple with economic and political uncertainties. Much of Europe remains plagued with debt and economic growth remains stagnant. The European Central Bank’s quantitative easing programme is aimed at encouraging growth and increasing inflation, although ongoing reform will be needed across the continent in order for Europe to return to full economic health.

It is not surprising that many investors have overlooked the region as an investment destination for much of the past decade. However, in our view it is important to distinguish between the prospects for economies and the prospects for companies. For many of Europe’s leading firms, much of their earnings are generated from their exposure to global markets. Investing in Europe therefore also means gaining exposure to truly international businesses, some of which are exposed to faster-growing regions of the world.

Europe may continue to face problems for some time to come. In our view, there are a number of successful managers in this sector that have proven investors can still be rewarded even when the economic backdrop is far from bright. Our favourites feature on the Wealth 150.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our favourite funds in this sector

First-class performance potential and low management charges

View the Wealth 150

Global stock markets faced a tough start to 2016, amid ongoing concerns over slowing global economic growth, and Europe was not immune. The continent’s stock markets went on to deliver healthy returns, however, and the pound’s weakness against the euro significantly boosted returns for UK-based investors. Over the 12 month period the FTSE World Europe ex UK Index grew 19.7%. Please note past performance is not a guide to future returns.

Some of 2015’s strongest-performing sectors, such as healthcare and consumer goods, delivered weaker returns last year. Funds with a bias to these areas therefore tended to underperform the broader European market. On the other hand, some of the more economically-sensitive areas of the market, such as resource-related industries that benefited from rising commodity prices, performed well. The financials sector, including banks, also staged a recovery in the second half of the year. As such, funds that tend to focus on undervalued and economically-sensitive sectors thrived in the latter half of the year.

Many investors have historically overlooked the continent as an investment destination. Despite the poor economic outlook Europe is home to many successful businesses with global earnings, and the region’s stock markets have generally performed well in recent years. Over the past five years the FTSE World Europe ex UK Index has risen 83.2%*, while the average fund in the sector has grown 89.4%, which highlights the ability of active fund managers to add value through astute stock picking, in our view.

European markets - five year performance

Source: Lipper IM* to 30/12/2016. Past performance is not a guide to future returns.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Five year performance

  • IA Europe ex. UK

    +89.5%

  • FTSE World Europe ex UK.

    +86.3%

Data correct as at 30/12/2016. Please remember past performance is not a guide to future returns.

Our favourite funds in the sector

We undertake a comprehensive review of every sector. Here we provide comments on a selection of funds of interest following our most recent European sector review. They are provided for your interest but are not a guide to how you should invest. If you are unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at January 2017. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

To view a full list of our favourite funds within the sector, visit the Wealth 150. There is a tiered charge to hold funds in the Vantage Service with a maximum of 0.45% p.a. - view our charges.

Wealth 150 funds

Other funds in the sector

Here we look at some other funds of interest following our most recent sector review. Please note the review period may be over a short time period and past performance is not a guide to future returns.

To view a full list of our favourite funds within the sector, visit the Wealth 150.

Source for performance figures: Financial Express

Alexander Darwall seeks companies with a market-leading advantage over competitors which, in his opinion, offer the prospect for long-term growth.

Following a period of strong performance, the fund’s bias to high-quality growth companies expected to deliver sustainable sales and earnings growth held back returns in 2016. Investors shunned these businesses in favour of some of the more economically-sensitive areas of the market. Exposure to the poor-performing healthcare sector proved most painful. Despite the short-term period of underperformance, we maintain our conviction in this highly-experienced European fund manager with a long-term record of exceptional stock picking. The fund is a concentrated portfolio of around 40 stocks, which means each investment can have a significant impact on performance, although this is a higher-risk approach.

Barry Norris aims to identify companies he believes have the potential to deliver positive earnings surprises. He runs a flexible portfolio and is prepared to take high-conviction views.

The fund struggled in 2016. It’s most prominent period of underperformance followed the UK’s vote to leave the EU in June when Barry Norris tilted the fund towards more defensive areas of the market and reduced exposure to domestically-focused, economically-sensitive industries. This did not work in the fund’s favour, however, given the subsequent outperformance of the latter type of company. The manager has built a stronger long-term track record. He is prepared to actively reposition the portfolio based on where he has identified the best opportunities, although the concentrated nature of the fund means we would expect performance to be volatile at times.

Chris Rice invests based on where he feels we are within the economic cycle, looking to invest in more financially-robust companies during a slowdown, and companies able to benefit from an improving economy during a recovery.

In early 2016 the fund missed out on some of the gains made in some of the more defensive areas of the market. Performance improved later in the year when businesses that Chris Rice felt offered greater value, such as commodity-related businesses, performed well. We feel the fund offers something different to others in the sector – at times it can look contrarian in nature and its positioning may not always be rewarded in the shorter term. However we are encouraged by the manager’s longer-term track record and his experience in managing European equities. Please note the fund manager has the flexibility to invest in higher-risk smaller companies.

Richard Pease favours internationally-competitive companies operating on a global scale, which he feels are built to prosper in both good and bad times for the wider economy.

We view Richard Pease as one of the most successful managers in the European sector. With over 25 years' experience investing in European equities, he has built a formidable reputation. In our view, he has been highly successful in selecting companies that have delivered good returns for their investors regardless of the wider economic and political environment. Our analysis attributes his performance to positive stock picking.

The manager runs a relatively concentrated portfolio of around 60 holdings, which enables each holding to make an impact on returns. He also invests flexibly across companies of all sizes, including small and medium-sized companies. We feel this approach has the potential to add value over prolonged periods, although it is a higher-risk strategy. Please note charges can be taken from capital which can increase the yield but reduces the potential for capital growth.

While John Bennett focuses individual stock selection he will also incorporate themes into the portfolio. He aims to correctly identify catalysts for positive change across industries and companies before other investors.

The fund struggled in the early part of 2016, although a change in the fund’s positioning, including increasing exposure to lowly-valued areas of the market such as financials, proved beneficial later in the year. We rate John Bennett as a quality fund manager and would expect him to deliver good returns for investors over the long term. That said, we currently have higher conviction in other funds that are currently included on the Wealth 150.

The manager seeks strong companies, which he defines as having a sustainable competitive advantage, pricing power and barriers to entry from competition.

The fund has delivered strong returns since Rory Powe took over its management in 2014 and our analysis suggests good stock selection has boosted performance. We view Rory Powe as a highly-experienced manager in running European equities with a well-defined process. He has a good long-term track record, although it is interspersed with significant periods of volatility. We would prefer to monitor his performance for a longer period at Man GLG before considering the fund for inclusion on the Wealth 150. Please note this is a concentrated portfolio of stocks and the manager can use derivatives, both of which increases risk.