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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
23 August 2019

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 success stories. We think this offers a lot of opportunity 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 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 economic or political background.

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’s 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 slipping into recession.

We generally 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 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.

Our analysis shows European stock markets offer good 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 50.

Otherwise you could consider the HL Multi-Manager European Fund. It invests in what we believe are some of the finest 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 50

It's been a volatile year for European stock markets.

Like most global stock markets, they fell towards the end of 2018 as investors worried about slowing economic growth and the potential for central banks to increase interest rates. Higher rates are often seen as a bad thing for share prices because the interest available on cash looks relatively more attractive.

But there was a change of heart at the start of this year. The US Federal Reserve suggested it would raise interest rates slower than expected, and subsequently cut them for the first time in a decade at the end of July. The European Central Bank also hinted it's prepared to provide further economic stimulus, and therefore market support, given Europe's fragile position.

The market has performed well so far this year. The shares of European larger companies have done better than smaller ones though, so the average fund investing in smaller businesses hasn't performed as well. They have tended to do worse when investors are less confident about the economy’s prospects, though we think they have great long-term growth potential. Past performance isn’t a guide to future returns.

European sectors - one year performance

Past performance is not a guide to future returns. Source: Lipper IM, correct at 31/07/2019.

Over the long run, European stock markets have performed well. There have been some setbacks along the way, caused by bigger events such as the 2008 financial crisis and the 2011 Greek debt crisis. But many companies have come back fighting fit and European stock markets have delivered healthy returns.

We’re not complacent about the issues facing Europe and no doubt there will be some stumbling blocks over the coming years. Over the long term we think investors will be rewarded for their patience as there will always be companies strong enough to beat economic problems. We like fund managers who are able to identify and invest in these opportunities.

Annual percentage growth
Jul 14 -
Jul 15
Jul 15 -
Jul 16
Jul 16 -
Jul 17
Jul 17 -
Jul 18
Jul 18 -
Jul 19
IA Europe ex UK 10.4% 8.4% 23.7% 5.2% 1.7%
IA European Smaller Companies 14.3% 15.0% 28.6% 9.2% -2.8%

Past performance is not a guide to future returns. Source: Lipper IM, correct at 31/07/2019.

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

    +58.4%

  • IA European Smaller Companies

    +79.4%

Data correct as at 31/07/2019. 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 our favourite 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 August 2019.

For more information on the risks, please refer to the Key Investor Information Document 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 50. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% p.a. - view our charges.

Wealth 50 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 50.

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.

Nick Williams and his team specifically look for companies where any earnings potential hasn't been recognised by other investors yet. If they're right and these businesses turn out to be successful and grow their profits, their share prices could rise. He has an edge in spotting these opportunities before others because most investors pay more attention to larger companies. He also has a well-resourced team by his side to help uncover potential future winners. They've got it right more often than not over the long term, and it's good to see the fund perform better than its benchmark over the past year too. Past performance isn't a guide to the future though.

Richard Pease likes companies with a niche product or service, which makes it harder for other companies to compete with them. He invests in companies of all sizes, including higher-risk smaller companies.

Richard Pease has built an outstanding reputation investing in European shares. We like his investment approach: he looks for opportunities off the beaten track, which may have been overlooked or misunderstood by other investors. The fund hasn't done quite so well as the broader European stock market over the past year. We’re encouraged by the manager’s longer-term track record. Our research shows he’s been able to identify companies with some of the best growth prospects. He invests in a fairly small number of companies, which means each one can have a big impact on performance, though this is a higher-risk approach. He’s 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 likes high-quality companies he thinks can grow their earnings at a sustainable rate.

A focus on companies the manager thinks have good growth prospects, despite what’s going on in the wider economy or politics, has worked well for the fund over the long term. And the fund's performed particularly well so far this year – a bias towards consumer goods companies, and little exposure to the weaker financials sector, has been helpful. So has some investments in healthcare-related companies, such as Grifols and Philips. David Dudding, the fund's lead manager, invests in a small collection of his best ideas, which increases risk. He is a highly-experienced investor in European shares, and we think he has the ability to deliver for investors over the long run. There are no guarantees though and past performance isn't a guide to future returns.

Chris Rice looks at what’s going on in the economy. He then aims to identify the next stage of the business cycle and invest in companies he thinks will perform best, including some higher-risk smaller companies.

Chris Rice is cautious and thinks European economic growth is slowing down. So he’s focused on companies he thinks will hold up better in this environment, including healthcare and telecoms companies. This worked well when the broader European stock market fell towards the end of 2018, though it means the fund's lagged a strongly-rising market so far this year. We think this fund will continue to prove valuable when stock markets hit a rough patch and we like that it does something different to a lot of others in the European sector. It could provide useful diversification to a broader investment portfolio.

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 drinks company Nestlé, healthcare companies Roche and Novartis, and luxury goods business LVMH. Legal & General is a respected tracker fund manager with a good record of tracking indices efficiently.

Sam Morse looks for companies with the potential to make plenty of cash, which could help support a healthy and growing dividend. We view this as a more conservative fund in the European sector.

Morse focuses on larger companies he thinks will grow consistently and offer some stability, rather than those that deliver shorter bursts of stronger growth, but the potential for bigger setbacks. He also likes companies he thinks will grow their dividends at a steady pace. The amount he invests in each sector doesn't differ too much from the broader European stock market. This means performance is likely to be similar over shorter periods. But it could help deliver modest outperformance over the long run, without significant levels of volatility. There are no guarantees though.

We think Morse has the ability to deliver good returns for investors. But we already have a good line-up of quality managers with longer track records in the Europe sector on the list. They also have greater flexibility to invest differently to the broader market, which offers more potential to perform better over prolonged periods. Please note the manager can use derivatives, which adds risk.

The managers of this fund don't like to sit still. They consider what's going on in the wider economy and how this could affect different industries and companies. When their views change, they're prepared to change how the fund's invested quickly.

This fund's delivered good long-term returns, though it went through a tougher time towards the end of 2018. Exposure to sectors that tend to be more sensitive to the health of the economy, such as industrials and technology, held back returns. It's been a different story so far this year though and the fund's performed well.

We like the managers' flexible approach. It's led to good long-term returns. It's a more aggressive style compared with some other managers though, and the fund's performance has been volatile at times. The managers invest in companies of all sizes, including higher-risk smaller companies. We think it's a good choice for exposure to European stock markets. But there are a number of great fund managers in this sector that are currently on the Wealth 50 and available at lower fund charges.

Latest research updates

JOHCM Continental European - Europe's economy set to improve

JOHCM Continental European - Europe's economy set to improve

Thu 21 November 2019

Some managers use their economic views to invest their fund in a way they think is best suited to the current climate. Paul Wild is one of them, and here we take a look at what’s happened to his fund over the past year.

BlackRock Continental European Income - dividends beyond the UK

BlackRock Continental European Income - dividends beyond the UK

Tue 19 November 2019

There aren't many European funds that focus on providing an income. This is one of the few and in this update we look at how the manager aims to achieve this.

TM Sanditon European – removal from the Wealth 50

TM Sanditon European – removal from the Wealth 50

Mon 21 October 2019

The TM Sanditon European Fund has been removed from the Wealth 50 list of our favourite funds...

Jupiter European – new managers take the reins

Jupiter European – new managers take the reins

Wed 09 October 2019

Mark Nichols has taken over management of Jupiter European from Alexander Darwall. We recently spoke to him about his plans for the fund, and what he intends to change.

Fidelity European - looking for dividend growth

Fidelity European - looking for dividend growth

Fri 19 July 2019

Sam Morse is more cautious than a lot of other managers investing in Europe. Find out what this means for the fund and how we expect it to perform.

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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