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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
31 August 2018

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

Europe’s had its fair share of problems in recent years, but there are reasons to be positive. The region is home to lots of businesses that make money from across the globe. This means they have the chance to be successful, no matter what’s going on in the wider economic or political environment.

There are also lots of quality fund managers investing in Europe with great track records. Most funds investing here focus on larger companies. Some invest in small and medium-sized companies. These typically 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 very high, and some Eurozone banks have been close to failing.

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

We think most long-term portfolios focused on growth should have at least some exposure to Europe. It means you’ll invest in some of the world’s most successful companies. Some of these own brands that are known worldwide, so they provide exposure to global markets, including faster-growing economies.

Our analysis shows European stock markets offer reasonable value. This means the shares of some companies can be bought at a price that’s lower than their expected growth potential.

There are a number of successful managers in this sector and our favourites feature on the Wealth 150+.

Alternatively, you could consider the HL Multi-Manager European Fund. It invests in our favourite European funds in a single investment. It’s looked after by a team of investment experts, so there are additional charges 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

The European stock market grew 5.8%* over the year to 31 July 2018. But it’s been volatile, especially so far this year.

Investors were unsettled by political uncertainty in June, when an attempt to form a coalition government in Italy fell through. Europe, like many other countries, also faces a trade war with the US and this hasn’t helped either. More recently, and as I write in August 2018, Turkey’s spat with the US and a sharp decline in the Lira, has left investors with another headache.

European smaller companies, which tend to be less affected by what’s going on in the broader global economy, performed much better than larger firms over the year. Past performance isn’t a guide to future returns though.

European sectors - one year performance

Past performance is not a guide to future returns. Source: *Lipper IM, correct at 31/07/2018

European stock markets have performed well over the long run. Bigger events, such as the 2008 financial crisis and the 2011 Greek debt crisis, have caused setbacks along the way. But many companies have come back fighting fit and over the past five years the broad European stock market has grown 61.1%.

We’re not complacent about the issues facing Europe. Over the long term we think investors will generally be rewarded for their patience as there will always be companies strong enough to beat economic problems. We like fund managers able to identify and invest in these opportunities over the long run.

Annual percentage growth
July 2013 -
July 2014
July 2014 -
July 2015
July 2015 -
July 2016
July 2016 -
July 2017
July 2017 -
July 2018
FTSE World Europe ex UK 4.1 9.6 7.1 24.6 5.8
IA Europe 3.1 10.4 8.4 23.7 5.2
IA European Smaller Companies 5.6 14.3 15.0 28.6 9.2

Past performance is not a guide to future returns. Source: Lipper IM, correct at 31/07/2018.

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

    +61.1%

  • IA Europe ex UK

    +60.5%

  • IA European Smaller Companies

    +94.9%

Data correct as at 31/07/2018. Please remember past performance is not a guide to future returns.

Our favourite funds in the sector

We regularly review all the main investment sectors. Here we provide comments on a selection of funds in the European sectors. They're provided for your interest but not a guide to how you should invest. If you're unsure if an investment suits your circumstances seek personal advice. Comments are correct as at July 2018.

Most of the funds listed below invest in a relatively small number of companies. This means each investment can have a significant impact on performance, but 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 you could get back less than you 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

This fund focuses on higher-risk small and medium-sized companies. We think it offers something different to a lot of other European funds that focus on larger businesses.

European smaller companies performed better than larger companies over the past year. This helped the fund’s performance. It’s also recently benefited from individual investments in companies such as Scandic Hotels, a Swedish-based hotel operator, and Maire Tecnimont, an Italian engineering & construction company. Nick Williams manages this fund and has a good team of investors working with him. They’re strict in the way they run the fund and this has worked well over the long run. Past performance shouldn’t be seen as a guide to the future though.

Alexander Darwall mainly focuses on larger companies. He likes businesses that do something different to their competitors, such as offering a unique product or service.

It’s been a strong year for the fund and it’s performed much better than the broad European stock market. The manager has invested in some of Europe’s best-performing companies, such as Wirecard, which provides digital payment solutions. The company has consistently grown its earnings, helped by an increasing number of payments made online. We think Alexander Darwall is a talented stock-picker and have high hopes for the fund’s future. Past performance isn’t a guide to the future though and the fund will inevitably experience both good and weaker periods.

This fund aims to track the performance of the FTSE World Europe ex UK Index. It’s a low-cost way to invest in a broad range of European companies.

This fund provides a straightforward way to invest in lots of different companies from across the continent. It currently invests in more than 500 companies. Some of its largest investments include food and drink company Nestlé, tech company Siemens and healthcare company Novartis. Legal & General is a respected tracker fund manager with a good record of tracking indices efficiently.

The managers use a recovery investment style. They invest in companies that have been through a tough patch, but have the potential to recover and subsequently see their share prices rise.

Andrew Lyddon and Andrew Evans took over management of this fund in May 2018 and changed the way it’s invested. They’ve run several other European funds since 2016. This is over a short period of time, so they don't have a long enough track record investing in Europe that we can analyse. We'd prefer the managers to build a longer record so we can make a full assessment of their capabilities. For this reason the fund doesn't currently feature on the Wealth 150 list of our favourite funds.

Barry Norris aims to invest in companies that’ll deliver better-than-expected earnings growth. He’ll sometimes change the way the fund is invested quite quickly, and invests in companies of all sizes, including higher-risk smaller companies.

We recently removed this fund from the Wealth 150. For the Wealth 150 we seek managers with an ability to invest in some of the market's strongest-performing stocks, regardless of what sector or country they're located. But our analysis shows Barry Norris’s stock-picking has been weak in recent years. The fund is also currently priced at a significant premium to others we think have better long-term prospects. The European sector is very competitive and we currently have more conviction in other managers.

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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