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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 July 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. Ongoing political and economic uncertainty should not be overlooked. However, sentiment towards the region recently picked up following the election of French President Emmanuel Macron, while the continent’s economic recovery also appears to be making some headway.
  • Despite a relatively 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 European 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.

HL View

Europe has certainly had plenty to contend with in recent years as investors have continued to grapple with economic and political uncertainties. Much of Europe remains plagued with debt and, while the economy is on the road to recovery, there is a lot of work to be done to get the continent back to full health. The market recently reacted positively to comments made by Mario Draghi, President of the European Central Bank, although he subsequently made it clear the Bank is some way off withdrawing its quantitative easing programme, aimed at encouraging growth and increasing inflation.

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 generally performed well over the past year, although Europe led the charge and ended the year as one of the world’s best-performing major stock markets. The pound’s weakness against the euro helped to boost returns for UK-based investors and over the 12 month period the FTSE World Europe ex UK Index grew by an impressive 29.1%. Higher-risk smaller companies were stronger still and grew 35.8%, which benefitted funds with a bias towards this area of the market. Please remember past performance is not a guide to future returns.

An improvement in investor sentiment, and belief the euro zone’s recovery is strengthening, led to particularly strong returns from some of the more economically-sensitive areas of the market, such as financials and basic materials, as well as technology. Sectors typically favoured for their more defensive characteristics, including healthcare and telecoms, were weaker over the year, although they still delivered positive returns.

Many investors have historically overlooked the continent as an investment destination. Despite a relatively poor economic outlook Europe is home to many businesses that have continued to thrive 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 105.9%*, while the average fund in the sector has grown 110.3%. In our view, there are a number of high-calibre active fund managers in this sector that have proven their ability to add value through astute stock picking.

European markets - five year performance

Past performance is not a guide to future returns. Source: *Lipper IM, correct at 30/06/2017.

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

    +110.3%

  • FTSE World Europe ex UK.

    +105.9%

Data correct as at 30/06/2017. 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 July 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

This fund tracks the FTSE World Europe ex UK Index and provides a low-cost way for investors to gain broad exposure to opportunities across the continent.

The fund provides a straightforward way to invest in stocks from across Europe and currently provides exposure to 507 companies. Legal & General is a respected tracker fund manager who run the fund conservatively to ensure it tracks its index efficiently.

Paul Wild takes into account the prevailing economic environment in order to invest in what he feels could be the best-performing sectors at the right time. This is combined with individual stock selection.

The fund has underperformed the broader European stock market over the past year, although it still managed to deliver a strong positive return. Investments in the financials sectors benefited returns, while those in the healthcare and consumer goods sectors dragged on performance. Over the long term the manager has added considerable value for investors, which our analysis suggests has been driven by good stock selection, although this is not a guide to the future.

Please note this is an offshore fund, which means investors are not normally entitled to compensation through the UK Financial Services Compensation Scheme. It also carries a performance fee. Further details can be found in the Key Investor Information Document.

With its focus on smaller businesses, we feel this fund offers something different to the majority of European funds that have greater focus on larger companies.

A bias towards medium-sized and higher-risk smaller companies, which have outperformed their larger counterparts over the past year, has boosted the fund’s performance. That said, a lack of exposure to some of the better-performing and more economically-sensitive areas of the market, such as financials, weighed on returns. Over the longer term our analysis suggests the manager has an excellent track record in picking stocks that perform well regardless of which sector or country they are located.

David Dudding’s investment style is fairly conservative, with a preference for high-quality companies and a focus on the sustainability of a company's earnings and cash flows.

While the fund delivered a positive return over the past year, the manager’s conservative investment approach held back performance somewhat in an environment of rapidly rising share prices. Exposure to the weaker-performing healthcare sector, for instance, did not help. Over the longer term, this approach has tended to provide the fund with some resilience during weaker periods for the market, whilst capturing the majority of a rising market. David Dudding has built an impressive long-term track record and runs a concentrated portfolio, which means each investment can contribute significantly to performance, although this is a higher-risk approach.

The manager focuses on quality companies he believes are capable of consistent dividend growth. His conservative investment approach means the fund’s sector positioning does not deviate significantly from the benchmark.

Sam Morse’s benchmark-aware and naturally conservative approach means this fund could hold up relatively well in unsettled markets. However, the fund could lag a rapidly rising market, particularly when some of the more economically-sensitive areas of the market are performing strongly, as seen over the past year. The fund does not currently feature on the Wealth 150. While we believe Sam Morse has the ability to deliver good long-term returns, we feel we already have a good line-up of quality managers in the European sector with longer track records. They also adopt a more unconstrained approach to investing in the region, which we feel has the potential to deliver superior long-term returns.

Rob Burnett initially forms a view of the wider economy. He then selects sectors and companies he believes offer the best opportunity for growth given the prevailing economic climate.

This concentrated fund has been positioned to benefit from a euro zone recovery for a number of years and has held a bias towards sectors including financials and basic materials. This has provided a significant boost to performance over the past year, although the fund underperformed the broader European stock market for several years prior to this as a result of weak stock selection, according to our analysis. The manager also changes the positioning of the portfolio aggressively at times, which means performance can be volatile. We view Rob Burnett as an experienced manager in this sector, however, we currently favour others with a more consistent and stronger record of outperformance.