2014 presented significant challenges for Europe. While the Ukrainian crisis unfolded, we also saw rising concerns over slowing economic growth and deflation. By the end of the year, Europe had seen a lacklustre year both economically and in its stock market performance.
Oliver Russ, manager of the FP Argonaut European Income Fund, anticipates a gradual recovery in the euro zone in 2015, provided no further unexpected events derail its progress. The sharp fall in the oil price and the ECB's quantitative easing programme could also add fuel to the economy.
European company earnings have contracted over the last few years; however, Oliver Russ expects earnings growth to pick up this year, which could in turn bode well for share prices. Should earnings grow; dividend-paying companies also have the potential to increase their distribution payments to shareholders. In fact, companies in most industries are expected to increase dividends over the course of this year, apart from specific sectors such as oil & gas production.
Percentage of MSCI Europe companies raising DPS (Dividend Per Share)
Source: Argonaut Capital, correct at 30/06/2014
The oil & gas sector currently represents 10% of all dividends paid in Europe, although this is expected to fall this year. Financials, on the other hand, account for a quarter of all income paid, and Oliver Russ expects to see the largest increase from this sector. The fund's financials exposure, accounting for over a third of the portfolio, currently has greater focus on insurers. However, the manager may begin increasing exposure to the banking sector this year - he views it positively that many banks have increased their capital base in recent years as it means they should be less vulnerable in a downturn.
Composition of Dividends in Index
Source: Argonaut Capital, correct at 20/02/2014
Overall, 2014 was a relatively mute year for the fund, falling marginally by 0.1% against a flat return for its benchmark, the MSCI Europe ex UK Index, although past performance is not a guide to future returns. The fund benefited from strong performances from a number of stocks including Swedish food retailer Axfood, and budget airline Ryanair. However, this was offset by particularly disappointing performances from stocks including offshore drilling company Seadrill, which suffered due to the drop in the oil price.
Our view on this fund
Oliver Russ has managed this fund since its launch in December 2005 and it has since underperformed its benchmark and the sector average (the fund has delivered a return of 68.9%, with dividends reinvested, compared with 82.7% for the index and 74.5%* for the sector average). Our research suggests the fund's sector and geographical positioning has detracted value over the manager's tenure. While we feel there has been some improvement in stock selection over the past few years, it has been inconsistent over the longer term. As a concentrated portfolio each investment can have a significant impact on returns however this a higher risk strategy.
|Annual percentage growth|
| Feb 10 -
| Feb 11 -
| Feb 12 -
| Feb 13 -
| Feb 14 -
|FP Argonaut European Income||11.3%||-10.6%||19.2%||10.4%||8.6%|
|MSCI Europe ex UK||14.6%||-11.7%||23.5%||9.0%||8.5%|
|IA Europe ex UK||14.7%||-11.4%||23.3%||12.1%||5.1%|
Past performance is not a guide to future returns. Source: Lipper IM* to 02/02/2015
The fund currently yields an attractive 4.08% (variable and not guaranteed). While we believe the fund has the potential to deliver reasonable returns over the longer term, the European sector is home to some outstanding managers and, therefore, this fund is not on the Wealth 150 list of our favourite funds across the major sectors.
Please note the fund's charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.