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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
13 February 2018

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, but there are reasons to be positive. The continent is home to businesses that generate earnings from across the globe and thrive regardless of the economic and political backdrop.

The European sector features many high-calibre fund managers with great track records. Many funds in the sector focus on larger companies. Others invest in small and medium-sized companies, which often offer superior growth potential, but are higher risk. Most typically focus on growing capital, but there are some funds in the sector that seek dividend-paying companies in order to generate a regular income.

HL View

The eurozone’s economic recovery has recently gathered pace and sentiment towards the region has improved.

European businesses recently reported their strongest month of growth since before the financial crisis and this is expected to accelerate further. An improvement in company earnings growth over the past year is a positive, as growing earnings tend to support rising share prices over the long run.

Investors often overlook the continent as a place to invest, but we believe most portfolios focused on growth should have at least some exposure. Investing in Europe means gaining exposure to some of the world’s most successful companies – some are the owners of well-known brands and provide exposure to global markets, including faster-growing regions of the world.

European stock markets still offer reasonable value, according to our analysis. This means the shares of some companies can be bought at an attractive price in comparison with their future growth potential.

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+.

Alternatively, you could consider the HL Multi-Manager European Fund which invests in our favourite European funds in a single investment. Please note there are additional charges associated with running a multi-manager fund. The fund is managed by our sister company, HL Fund Managers.

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

Most global stock markets grew strongly over the year to 31 January 2018 and Europe was no exception. Many investors became more confident in the region’s prospects, as many companies started to deliver stronger results and several anti-EU political parties were rejected by their constituents.

Over the year the main European stock market, as measured by the FTSE World Europe ex UK Index, grew 18.2%*. The shares of European smaller companies were even stronger and this benefited funds with a bias towards this area of the market, although this should not be seen as a guide to future performance.

European sectors - one year performance

Past performance is not a guide to future returns. Source: *Lipper IM, correct at 31/01/2018

European stock markets have also performed well over the longer term. However, they were volatile in the years that followed the 2008 financial crisis and the euro zone debt crisis led to a number of setbacks. Many companies have overcome these issues and come back stronger. Over the past five years, the FTSE World Europe ex UK Index has grown 72.0% and there are many high-quality active fund managers that have achieved an even greater return.

In our view European companies have the ability to survive and prosper regardless of the economic and political backdrop. Periods of volatility should not be overlooked, however. While political threats have abated, they haven’t gone away altogether. Furthermore, the European Central Bank plans to scale back its quantitative easing programme, which has helped keep markets buoyant in recent years, in 2018. That said, the bank has promised to continue its efforts to stimulate the economy for as long as necessary.

Name % Growth % Growth % Growth % Growth % Growth
Jan 2013 -
Jan 2014
Jan 2014 -
Jan 2015
Jan 2015 -
Jan 2016
Jan 2016 -
Jan 2017
Jan 2017 -
Jan 2018
FTSE World Europe 11.1 7.5 -2.1 24.4 18.2
IA Europe ex UK 11.8 6.8 0.1 24.2 17.4
IA European Smaller Companies 18.9 2.7 11.0 25.8 24.8

Past performance is not a guide to future returns. Source: Lipper IM, correct at 31/01/2018.

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

  • FTSE World Europe ex UK

    +72.0%

  • IA Europe ex UK

    +74.0%

  • IA European Smaller Companies

    +112.6%

Data correct as at 31/01/2018. Please remember past performance is not a guide to future returns.

Our favourite funds in the sector

We undertake a comprehensive review of all the major sectors and here we provide comments on a selection of funds in this sector. 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 2018.

Most of the funds listed below invest in a concentrated number of investments, which means each one can have a significant impact on performance although it’s a higher-risk approach. For more information, please refer to the Key Investor Information for the specific fund. 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 with HL. It is 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 tends to focus on larger companies and seeks those he believes can adapt successfully to change. He prefers companies with a market-leading advantage over competitors, which offer a differentiated product or service.

The manager looks for companies he believes can overcome challenges posed by changes in technology, regulation, and consumer behaviour. This leads him to invest in a range of unique companies from a variety of different sectors. These companies have tended to thrive regardless of wider economic conditions and it’s an approach that has worked well for the fund over both the short and long term. Over the past year, our analysis suggests the manager has invested in some of the market’s strongest-performing stocks. This helped the fund outpace the broader market. Please remember past performance is not a guide to future returns.

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

Following several years of strong performance, Chris Rice is cautious in his outlook for global stock markets. In some sectors he believes share prices and valuations are at elevated levels, so he has focused on areas he thinks offer greater value, such as telecoms, pharmaceuticals, and retailing. These areas have been out of favour with investors over the past year, which has held back returns.

We feel the fund offers something different to others in the sector. At times the manager invests in out-of-favour companies that he expects will later perform well, but this means the fund may not always be rewarded in the shorter term. We are encouraged by the manager’s longer-term track record and his experience in managing European shares. Please note he has the flexibility to invest in higher-risk smaller companies.

Richard Pease favours companies with a niche product or service, which he feels are built to prosper in both good and bad times for the economy. He invests in companies of all sizes, including higher-risk smaller companies.

Richard Pease has built a formidable reputation investing in European shares and we like his unique investment approach: he is willing to look for opportunities off the beaten track, which may have been overlooked or misunderstood by other investors. The fund has performed well over the past year, and our research suggests the manager’s ability to identify companies with the best growth prospects helped. The manager has used the same strategy to great effect for many years and we believe he has one of the best records of picking strong-performing stocks in the European sector.

David Dudding’s investment style is fairly conservative. He favours high-quality, larger companies and focuses on the sustainability of a company's earnings and cash flows.

David Dudding is a highly-experienced investor in European shares with a 15-year track record. He also has the support of an experienced team at Threadneedle and has been joined by co-manager Mark Nichols since July 2016. The fund has performed well over the past year and outperformed the broader European stock market. A focus on companies the manager believes have good growth prospects, despite wider economic and political issues, has worked well for the fund over both the short and long term, although this is not a guide to how the fund will perform in future.

The manager invests in companies of all sizes, but has tended to focus on medium-sized and higher-risk smaller companies. The fund therefore offers something different to many others in the sector.

David Walton focuses on profitable companies with healthy finances, which he believes have the potential to grow and expand. He believes it’s important to understand the management behind a company and how they have performed in the past. It should be remembered past performance is not a guide to future returns. The fund performed exceptionally well for a couple of years until mid-2017, but the manager’s longer-term track record has delivered mixed results. We recently met David Walton to get a better understanding of the fund and his investment process, but this is a manager we would prefer to get know better over the longer term. We’d also like to see him deliver good performance through superior stock-picking over a prolonged period. The fund does not currently feature on the Wealth 150.

John Bennett considers the prospects for individual companies, but at times he also incorporates themes or takes a strong view on a particular sector. The fund is mainly focused on larger European companies.

The fund has had a tough couple of years. The manager has tended to focus on more out-of-favour areas of the market that he believes offer greater value. However, these companies have been overlooked by many investors, who have instead favoured companies perceived to have more sustainable growth prospects. John Bennett is an experienced investor – we rate him as a good 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.

Latest research updates

Baring Europe Select - an exciting way to invest in Europe

Baring Europe Select - an exciting way to invest in Europe

Wed 30 May 2018

Baring Europe Select offers something different to a lot of other funds investing in Europe. Find out more, including the fund manager's outlook, in our latest update.

Schroders makes changes to the European Opportunities Fund

Schroders makes changes to the European Opportunities Fund

Mon 14 May 2018

Schroders have made some changes to their European Opportunities Fund. In this update we consider what this means for the fund and investors.

FP Argonaut European Alpha - removed from the Wealth 150

FP Argonaut European Alpha - removed from the Wealth 150

Thu 08 March 2018

The FP Argonaut European Alpha Fund has been removed from the Wealth 150 list of our favourite funds for new investment.

An update on the Jupiter European Fund

An update on the Jupiter European Fund

Tue 06 March 2018

Alexander Darwall seeks companies with a unique and sustainable competitive advantage. We look at how this has impacted recent performance and consider the fund's future prospects.

Threadneedle European Select - economic recovery gathers pace

Threadneedle European Select - economic recovery gathers pace

Fri 26 January 2018

Investor sentiment towards Europe improved throughout 2017 as the euro zone’s economic recovery gathered pace. In our latest update we take a look at how the fund performed last year and the outlook.

Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

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