The strength and longevity of the European recovery is being debated, with some commentators warning that the economy could be dragged back into recession at best or into deflation at worst.Others are expanding into peripheral Europe to try to surf the wave of recovery, but Dennehy says investors should entrust their money to front-runner European funds with momentum behind them rather than trying to get too clever.
“The truth is no one knows what type of European fund you should buy, in terms of the balance. So we simply use momentum to identify funds that are winners now,” he said.
“We don’t need to know why they are winners today – in fact we don’t care – we just need to know that buying a fund with momentum today means, statistically, it is highly likely to be outperforming in six months.”
According to FE Analytics, Cazenove European Income has outperformed both its sector and benchmark since it launched in May 2012.
It has returned 73.66 per cent over this period compared with 45.36 and 44.82 per cent from its benchmark and sector, respectively.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund has also performed particularly well over the past year, coming in first for returns out of the 100 funds in its Europe ex UK sector, returning 36.69 per cent.
A further seven funds have all returned more than 25 per cent over the past year, including Invesco Perpetual European Equity Income which was the second best performer after Cazenove European Income.
AFI panellist Paul Warner, managing director of Minerva Fund Management, said in a recent interview with FE Trustnet that wider European growth still presented opportunities for fund managers and their investors, but that it was too late to buy into the peripheral European recovery.
“There is definitely value within Europe, but the story of the periphery coming out of negative territory has already played out in the market. The Spanish employment figures are a lagging indicator.”
However, Ben Willis, head of research at Whitechurch and another AFI panellist, recently said he believed peripheral Europe is the last remaining value play among developed markets and that he was putting his 2014 ISA allowance in Stephanie Butcher’s £225m Invesco Perpetual European Equity Income fund.
It is the second best performer over the past year after Cazenove European Income.
Performance of fund vs sector over 3yrs
Source: FE Analytics
According to FE Analytics, the fund has outperformed both its sector and benchmark over three years and is the third best performer out of the 94 constituents. It returned 44.04 per cent over this time compared with a sector average of 26.56 per cent and a benchmark return of 23.17 per cent.
While the crisis is by no means over, the wider European economy has been showing signs of recovery as even the countries hardest hit by the eurozone debt crisis are moving out of recession.
The European Central Bank announced today it would keep interest rates low at 0.25 per cent, which was taken by some experts as a sign that its president Mario Draghi believes a recovery is underway and the risk of deflation is lessening.
Draghi has been keen to reject the notion that Japan-style deflation could come to Europe, due to the devastating effect it would have on the recovery.
Neil Staines, head of research at ECU group, recently told FE Trustnet that despite the authorities’ denials, investors need to take into consideration the very real possibility of deflation in the eurozone as consumers wait for prices to fall before spending money.
“The whole context of deflation in the eurozone is going to be examined,” he said.
“Whether or not you can define certain parts of the eurozone as already being in deflation depends on the definition.”
“In some parts of the periphery, they are already experiencing negative prices, while in Italy and Spain inflation is below 0.7 per cent, which isn’t great.”
A sell-off in US equities would likely generate contagion into the European markets, Dennehy warns, which could be a reason to steer clear of the continent altogether.
