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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.

David Holder - Senior Investment Analyst
09 July 2021

Europe is more than just a single continent. It’s politically, economically and culturally diverse. From Norway and Sweden in Northern Europe to Spain and Italy in the South, each area has its own struggles and success stories. We think this diversity offers opportunities for investors.

Europe’s had its fair share of problems in recent years, but there are reasons to be positive. It's home to lots of first class businesses that have made money from across the globe. This means they have the chance to be successful, no matter what’s going on in the economic or political background although of course there are no guarantees.

There are also lots of quality fund managers investing in Europe with great track records. Most focus on larger companies. Some invest in small and medium-sized companies. These offer greater growth potential, but they’re higher risk than larger firms.

Most European funds aim to grow your investment, but there’s an increasing number of funds that focus on dividend-paying companies in order to pay investors a regular income.

Our View

Europe has overcome a lot of problems in recent years. But it’s not out of the woods just yet. Debt levels for both governments and individuals are high, some Eurozone banks have been on the brink of failing, and some countries have been close to or have slipped into recession. Many European nations have also been hit hard by the economic restrictions associated with coronavirus.

We generally think investors should try to ignore economic news and focus on the prospects for individual companies. In the short term, changes in the economy and investor sentiment can affect how the stock market performs. But over the long run share prices are more driven by how successful businesses are and their earnings growth. Trying to time markets or second guess the effect of economic news has had little impact on investment success over the long term.

We think most long-term growth portfolios should have at least some exposure to Europe. It means investing in some of the world’s most successful companies. Some of these carry out business worldwide, so they provide exposure to global markets, including faster-growing economies.

There are a number of successful managers in this sector and the Wealth Shortlist features those chosen by our analysts for their long-term performance potential.

Remember all investments can fall as well as rise in value and you may not get back what you invest.

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.

Wealth Shortlist funds in this sector

Funds chosen by our analysts for their long-term performance potential

See the Wealth Shortlist

Like most major global stock markets, the broader European stock market took a tumble in March 2020. It has since recovered well, rising 26.6% over the past year*, though past performance isn’t a guide to future returns.

Europe’s major markets, such as France and Germany, have posted decent returns. The outlier is Switzerland, which has returned a lower 10.4% over the past 12 months, though this is still a good return. The Swiss market is home to companies such as consumer staple Nestle and heath care giants Roche and Novartis.

Chart showing performance of European markets

Scroll across to see the full chart.

Past performance is not a guide to future returns. Source: *Lipper IM to 31/05/2021.

Sectors performed differently too. Sectors linked to the health of the economy such as banks, industrials and basic materials all performed strongly as investors looked towards an end to COVID and a subsequent economic recovery. More stable and defensive sectors such as healthcare, food producers and telecoms were weaker, especially since November 2020 when vaccines were announced.

Chart showing performance of European sectors

Scroll across to see the full chart.

Past performance is not a guide to future returns. Source: Lipper IM to 31/05/2021.

European smaller companies outperformed larger European stocks, which builds on over 10 years of outperformance, though they are more volatile. Larger companies provided some stability and did better during the worse of the pandemic last year. More recently investors’ appetite for risk increased, investing more into higher-risk smaller companies.

In terms of investment style, the discovery of an effective COVID vaccine was the catalyst for “value” investing to start to outperform “growth” investing. Growth investing focuses on companies able to grow their earnings and cash flows significantly ahead of expectations or the wider market. In the years since the global financial crisis these companies performed well. Many of these are in the consumer staples and technology sectors.

In the post-pandemic fallout, inflation and the expectation of rising interest rates, which can affect the prospects for growth investing, have picked up. Some investors have rotated from growth to value investments, though it remains too early to tell if this is a longer-term trend. Either way, it’s a reminder of the benefits of having a diversified portfolio.

Looking Ahead

Market volatility is likely to remain with the evolving battle against the pandemic and the threat of mutations. There are also political changes in Europe with German Chancellor Angela Merkel stepping down later in 2021. Brexit tensions also simmer beneath the surface and geopolitical issues persist between the major democracies of the world and China and Russia.

European shares have staged a tentative comeback over the last year after underperforming the US and wider global markets over the last decade. The US is over-represented in industries such as technology which have done well for quite a while (over the past decade), while Europe is more exposed to financials, which have had a tougher time over this period. However, Europe has market leading companies that make money across the globe and look good value compared with some other markets. This, together with the nascent rotation from growth companies to more cyclical sectors, may herald a period of European market outperformance although nothing is certain.

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 Wealth Shortlist features a number of funds from this sector, selected by our analysts for their long-term performance potential. The Shortlist is designed to help investors build and maintain diversified portfolios. To use the Shortlist to build your portfolio or review your existing portfolio, you should be comfortable deciding if a fund fits your investment goals and attitude to risk. For investors who don't feel comfortable building and maintaining their own portfolio we offer ready-made solutions, which are aligned to broad investment objectives. For those who want extra help, you can also ask us for financial advice.

The fund reviews below are provided for your interest but are not a guide to how you should invest. For more information, please refer to the Key Investor Information for the specific fund. Remember all investments and the income they produce can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.

There is a tiered charge to hold funds on the HL platform. It is a maximum of 0.45% a year - view our charges. Comments are correct as at June 2021.

Wealth Shortlist fund reviews

This fund mainly invests in big firms in larger or more stable European economies, such as Switzerland, France, Germany and the Netherlands. We view it as a good all-round choice in this sector, or to sit alongside other European funds using different investment styles. It could also form part of a broader global investment portfolio focused on long-term growth. Overall the fund invests in a fairly small number of companies and this means each one could have a big impact on performance, though this approach increases risk.

The team looks for quality companies with a sustainable competitive advantage – a unique quality that could help the business maintain higher earnings. A more conservative investment approach and focus on companies that could deliver more sustainable returns has seen the fund hold up better than the average European fund in weaker markets, though it hasn’t tended to rise as quickly in positive markets. Please remember past performance isn't a guide to future returns.

The fund has performed well over the past 12 months but has modestly lagged a strongly performing market. The funds aims to invest in larger “quality” growth companies. These fell out of favour towards the end of last year, whilst companies more closely linked to the health of the economy performed better. We continue to believe the fund is a good choice for mainstream European equity investment.

This fund aims to grow investors' wealth over the long term by investing in European companies of all sizes. This includes large, medium-sized and smaller businesses. The latter could boost growth because these companies are at an earlier stage of their development, but that also makes them higher-risk. The fact the fund invests in a relatively small number of companies is a higher-risk approach. Overall we think it could be used as a way to diversify the European part of an investment portfolio, or a broader global portfolio focused on long-term growth.

Richard Pease is a fund manager we've rated highly for many years. He's invested in European companies for more than three decades and built impressive knowledge of the market over this time. He also has a team of investors around him, including co-manager James Milne and research analyst Roland Grender.

Pease has used the same investment process for many years. In particular he likes businesses that do something unique and offer a product or service that other businesses struggle to replicate or do better. This has led to an enviable long-term track record, though the fund won't perform well all the time and past performance isn’t a guide to future returns.

The fund’s recent performance has been a little lacklustre. The market environment over recent years has been quite polarised. High growth companies were in demand until November 2020, which saw a rotation into value stocks. The fund isn’t overly invested in either of these areas, rather it focuses on underappreciated growth or unique companies. After recently speaking with CRUX we believe the team are able to build on their long-term record of outperformance. Charges are taken from capital which can increase income but reduces any capital returns.

This fund aims to boost long-term growth by focusing on small and medium-sized European companies. This makes it different to most other European funds that focus on larger firms. It could therefore diversify the European part of an investment portfolio, or a broader global portfolio focused on growth. A focus on smaller businesses increases risk and makes a longer investment horizon essential.

There aren’t many fund managers with such a long and successful track record of investing in this less familiar part of the European stock market. Nick Williams is one of the few. He also has the support of co-managers Rosie Simmonds, Colin Riddles and William Cuss.

Williams has used the same disciplined investment process for many years. He and his team follow a GARP (Growth at a Reasonable Price) philosophy. This means they look for companies that grow their earnings consistently, but whose shares can be bought at a lower price than the earnings potential suggests they should be. If the managers get their forecasts right and this potential is later recognised by more investors, the share price could rise though of course there are no guarantees.

Performance over the past 12 months has been good but it has lagged a strong market recovery since November 2020. The fund invests in good quality companies at attractive share prices that can be left behind in exuberant markets. Despite this, we continue to favour this experienced team’s approach to investing in this dynamic but riskier area of the market.

This fund aims to track the performance of the broader European stock market, as measured by the FTSE World Europe ex UK Index. It's currently made up of around 500 companies, focused towards sectors such as financials, consumer goods, healthcare, and industrial firms. While these companies are based in European countries, many of the market's largest firms sell their products and services across the globe, so they're not solely reliant on their domestic economies to be successful.

The fund invests across Europe, including Switzerland, France, Germany, Sweden, Spain and Italy. We think it's a convenient way to access companies across the continent, and could be used as a way to diversify a long-term, global investment portfolio.

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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.

Fund research

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