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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 - Senior Investment Analyst
03 February 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 amid the height of the coronavirus pandemic. It has since made some recovery, rising 8.6% over the year to the end of December 2020. While it’s fared much better than the UK, it hasn’t kept pace with some other global markets, such as the US, Japan, and most Asian markets. As always past performance isn’t a guide to future returns.

Looking a little closer, you’ll see there’s a divergence between the performance of different European markets. Much of this has to do with how different economies have coped with the virus. Denmark, for example, where virus cases have been relatively lower, has grown 41.2% over the past year. Other northern European markets, such as the Netherlands and Sweden have also done well. Spain, one of the worst-hit countries, has fallen 7.2%.

The real outlier though is the eastern European market. Russia, which makes up a significant part of this market, has fallen 14.9%. Apart from the virus, the oil & gas sector has been weak, damaged by an oil price slump earlier in 2020, and this has been painful for Russia as an exporter of natural resources.

European markets - performance throughout 2020

Past performance is not a guide to future returns. Source: Lipper IM to 31/12/2020.

Similar to the various countries, some sectors have fared better than others. As already mentioned, oil & gas companies have dealt with the blow of a volatile oil price. Banks and other financial businesses have also been shunned due to existing concerns over the strength of eurozone banks and their ability to withstand this crisis without sufficient support from key central banks. That said, we saw a rebound in the sector in November, following news of coronavirus vaccines.

Healthcare companies have held up relatively well this year as demand for medicines remains buoyant, in addition to a boost from hopes for a vaccine. So have utilities businesses, which are typically favoured for their more defensive characteristics in times of trouble. Some technology companies have also benefited, as people have looked for new ways to shop, communicate, and be entertained.

Going forward, volatility and uncertainty is likely to remain high around the progression of Covid-19, especially as the situation is evolving quickly. The rates of infection in Europe may have flattened somewhat over summer, but the recent resurgence means a full recovery has taken a backseat for now.

The speed at which vaccinations can be deployed across Europe will play a key role in how the continent progresses. It’s going to take some time, not only in Europe. But eventually this could lead to a more stable return of domestic demand, corporate profitability and consumer spending.

Over the longer term we think Europe has stored up potential. Some of the world's most successful companies are based there, and some carry out businesses worldwide, so they provide exposure to global markets, including faster-growing economies.

Importantly, all investors should ensure they maintain a diversified portfolio, whether by fund, geographical area, or type of asset (including the likes of shares, bonds, property, gold or cash). By holding investments with different drivers of returns you could reduce the chances of them all performing the same way.

Annual percentage growth
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
Dec 19 -
Dec 20
IA Europe ex UK 16.8% 17.4% -12.4% 20.1% 10.7%
IA European Smaller Companies 16.3% 25.8% -14.5% 19.9% 20.5%

Past performance is not a guide to future returns. Source: Lipper IM to 31/12/2020.

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

    +59.9%

  • IA European Smaller Companies

    +80.9%

Data correct as at 31/12/2020. Please remember past performance is not a guide to future returns.

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 December 2020.

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.

David Dudding stepped down as co-manager of the Threadneedle European Select Fund on 1 January 2021, but remains a deputy manager. At this time, Benjamin Moore was appointed lead manager. He has been co-manager of the fund since April 2019 and part of Threadneedle's European equities team since 2015. Roberta Zeno, who joined Threadneedle in 2020, also became a deputy manager.

While we are disappointed to see Dudding take a slight back seat on this fund, we are encouraged he will remain a deputy manager. The managers will also continue to be supported by a well-resourced European equities team.

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.

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.

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.

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. The fund can use derivatives, which adds risk if used.

Latest research updates

Barings Europe Select: February 2021 fund update

Barings Europe Select: February 2021 fund update

Mon 15 February 2021

In this fund update, Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of the Barings Europe Select fund.

Threadneedle European Select: December 2020 fund update

Threadneedle European Select: December 2020 fund update

Mon 14 December 2020

In this fund update, Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of the Threadneedle European Select Fund.

Legal & General European Index: November 2020 fund update

Legal & General European Index: November 2020 fund update

Mon 07 December 2020

In this update, Passive Investment Analyst Alex Watkins shares our analysis on the manager, process, culture, cost and performance of the Legal & General European Index fund.

TM CRUX European – September 2020 fund update

TM CRUX European – September 2020 fund update

Wed 07 October 2020

In this fund update, Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of the TM CRUX European Fund.

TM CRUX European Special Situations – September 2020 fund update

TM CRUX European Special Situations – September 2020 fund update

Thu 24 September 2020

In this fund update, Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of the TM CRUX European Special Situations fund.

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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