The latest figures from European Union statistical office Eurostat show inflation has fallen to 0.3 per cent across the eurozone, down from 0.4 per cent and moving even further from the ECB’s official target of below but close to 2 per cent.Investors have become increasingly concerned over how deflation could hit their portfolios but Chase de Vere’s Patrick Connolly (pictured) points out that there is little they can do other than stick with quality managers who are not afraid to take some short term pain in order to achieve strong long-term results.
“People can keep an eye on European deflation but it’s difficult to see what they can do about it,” he said.
“Clearly, deflation is a threat in Europe and the authorities are taking steps to negative that - whether they are doing enough or not is in question. It is a risk to European investors’ portfolios but also creates opportunities as a negative backdrop leads to stock falling to more attractive prices.”
Connolly says investors should look for European equity managers who are not constrained by their benchmarks and can invest with a high degree of conviction where they think the best opportunities are.
Below, we highlight three that he thinks fit the bill.
JPM Europe Dynamic Ex UK
One fund that Connolly “particularly likes” is John Baker, Jonathan Ingram and Blake Crawford’s £241.7m JPM Europe Dynamic Ex UK fund, as it has an experienced management team and strong long-term track record.
The four FE Crown-rated fund sits in the first quartile of IMA Europe excluding UK sector over one, three and five years although it has slipped into the fourth quartile over three and six-month time frames.
Since launch in September 2004, the fund is up 67.53 per cent.
This is some 20 percentage points ahead of the peer group’s average return and outperformance against its FTSE Developed Europe Ex UK benchmark.
Performance of fund vs sector and index since launch
Source: FE Analytics
Connolly said: “It’s a fund that largely gets ignored so it’s not one of the biggest European funds. It seems to glide under the radar, which leaves it as a smaller fund and gives the managers greater flexibility in how they run it.”
In terms of positioning, the fund’s biggest overweight is to the consumer goods sector while its’ underweight industrials and consumer services.
Its largest holding is Nestle, followed by Sanofi and Novartis.
JPM Europe Dynamic Ex UK has a clean ongoing charges figure (OCF) of 0.94 per cent.
Henderson European Growth
Richard Pease and Simon Rowe's £966.4m Henderson European Growth fund is another pick from Connolly.
It also appears on the FE Research Select 100 list of recommended funds.
Connolly said: “This is a pure stock-picking fund and looks for world-class, quality companies to buy at a cheap price then hold onto them until they recover. This means there’ll be periods of underperformance. Over the last year or so it’s performed that well but over the long term it produces really good results.”
According to FE Analytics, Henderson European Growth has made third quartile returns over one and three years.
However, over five years the fund is up 53.58 per cent against the sector’s average rise of 38.73 per cent - putting it in the first quartile.
Performance of fund vs sector and index since launch
Source: FE Analytics
As noted by Connolly, the four FE Crown-rated fund’s long-term performance is much more impressive.
Since launch in September 2001 it is up 198.43 per cent against its peers’ average rise of 99.7 per cent and its FTSE World Europe ex UK benchmark’s 49.72 per cent gain.
The FE Research team added: “While it won’t be the best-performing fund if the market suddenly rallies, it should continue to deliver impressive and consistent returns over the long term. The managers’ cautious approach makes them sceptical about the European recovery and thus they prefer companies with global trading activity.”
Henderson European Growth has clean ongoing charges of 0.84 per cent.
Threadneedle European Select
The final Europe fund pick from Connolly is David Dudding’s £2.1bn Threadneedle European Select fund, which is also on the FE Research Select 100 and holds five FE Crowns.
Threadneedle European Select was fourth quartile in 2013 when it made 22.15 per cent against the sector’s 26.13 per cent.
It is second quartile over one and three years and first quartile over five. Since Dudding took over the fund in September 2008 it has outpaced its sector and benchmark with a rise of 84.98 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
“Again, another fund that has underperformed slightly over the last year or so because it focus on good quality companies. David Dudding has built up a very strong long-term track record but as well uses the team approach that Threadneedle uses across all its funds.
This is very much a long-term fund,” Connolly said.
The FE Research team favours the fund because of its “outstanding” track record since Dudding took over.
The team adds that the manager’s focus on Europe’s strongest companies and a lack of exposure to banks and other cyclical sectors has served it well.
The fund’s largest sector overweights are to consumer goods and basic materials, which make up close to 50 per cent of the portfolio.
Its largest underweight is to financials at 11.5 per cent, compared with 23.3 per cent in the benchmark. Threadneedle European Select has clean ongoing charges of 1.06 per cent.
