A recent FE Trustnet poll showed that Europe was the most popular regional equity market for the year ahead with investors, as 29 per cent of the 2,524 who voted said it was the area they were most bullish on in 2016. 
While there are certain professional investors who warn against the consensually positive view on Europe given the uncertain political backdrop, the large majority of fund selectors we spoke to believed taking an overweight position in the continent was a prudent strategy.
Reasons to be positive on Europe (which outperformed all other regional equity markets apart from Japan last year), according to market commentators, include low valuations relative to the US, an improving economy and the ECB’s quantitative easing programme.
Therefore, in this article, we take a look at the top-rated European funds the professionals are backing this year for investors to consider within their portfolios.
FP Crux European Special Situations
Ben Willis, head of research at Whitechurch, was the most bullish on Europe out of the market commentators we spoke to and his preferred choice – from a growth perspective – is FE Alpha Manager Richard Pease’s £1.1bn FP Crux European Special Situations fund.
Pease has managed the fund since October 2009 and although it was originally called Henderson Special Situations, the manager was able to take the portfolio with him when he left the group and co-founded Crux Asset Management.
The manager has a disciplined strategy where he invests in companies with intangible assets, healthy balance sheets and recurring revenues which he deems to be attractively valued. Pease also has bias towards mid and small-caps.
The process has certainly worked over the longer term as the fund has been a top quartile performer in the IA Europe ex UK sector since inception, according to FE Analytics. Its gains of 82.37 per cent over that time mean it has nearly doubled the returns of its FTSE World Europe ex UK benchmark.
Performance of fund versus sector and index since launch
Source: FE Analytics
FP Crux European Special Situations has also beaten the sector in five out of the last six years and has done so with a top quartile maximum drawdown and Sharpe ratio, which measures risk-adjusted returns.
The fund, which is made up of 60 stocks, has 17.4 per cent in industrials, 15.9 per cent in services and 9.7 per cent in telecom, media and technology – which represent his largest sector weightings.
FP Crux Special Situations has a clean ongoing charges figure (OCF) of 0.84 per cent.
Standard Life Investments European Equity Income
Income remains a highly important theme and, given the ECB’s stimulus programme weighing on bond yields, most expect European dividend-paying stocks to perform well over the medium term.
Europe also has a long dividend culture and for those who want a European equity income fund, the team at FE Research rate this portfolio, which is managed by FE Alpha Manager Will James.
FE Research likes the £2.3bn Standard Life Investments European Equity Income fund as James focuses solely on dividends when analysing stocks (especially those which pay a high and reliable income stream) and as the manager is well-supported by a large team of analysts.
They say, however, that this strategy means the fund may well struggle in strongly rising markets but protects better on the downside.
According to FE Analytics, the fund – which yields 4 per cent – has narrowly outperformed the sector average since its launch in April 2009 with returns of 96.46 per cent. That being said, it has been top decile for its maximum drawdown and downside risk over that time.
James also has a decent dividend track record. Investors who put £10,000 into the fund at launch would have since earned £4,160 in income and, over that time, James has increased his pay-out in every year except one (though we still don’t have the complete figures for 2015).
Standard Life Investments European Equity Income is made up of 57 stocks and James largely focuses on some of the best known names in the region, with Roche, Nokia, Total and AXA all featuring in his top 10.
It has an OCF of 0.9 per cent.
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, is another who thinks that FE Trustnet readers are right to be bullish on Europe.
“Yes, I do broadly agree. Europe does seem the area with most value,” Morgan said.
His preferred portfolio within the region is FE Alpha Manager Alister Hibbert’s £2bn BlackRock European Dynamic fund, which takes a value approach as the manager aims to identify market inefficiencies by assessing stocks and keeping a close eye on macro developments.
Since Hibbert took charge in March 2008, the fund has been the sector’s third best performer with gains of 127.3 per cent meaning it has beaten its FTSE World Europe ex UK benchmark by a hefty 90.65 per cent.
Performance of fund versus sector and index under Hibbert
Source: FE Analytics
While BlackRock European Dynamic has tended to fall harder than the wider market during times of stress (such as in 2011 and 2014) it was top quartile in 2009, 2010, 2012 and 2015.
Hibbert’s largest overweights include healthcare, industrial and technology stocks while he is also taking big off-benchmark bets on peripheral markets such as Ireland and Italy.
Though the group have taken steps to limit inflows into the fund, it is still available on certain platforms and has an OCF of 0.93 per cent.
Artemis European Opportunities
Hawksmoor’s Ben Conway was one who was more cautious on European stocks. While he is bullish on an economic recovery in the region, he pointed out that the performance of stock markets and economies are rarely linked.
On top of that, he warned that few funds offer exposure to ‘domestic’ Europe.
“We tend to favour managers who share are view, even if they cannot create portfolios that are wholly focused on domestic Europe due to the lack of opportunities in listed companies shares,” Conway said.
“Moreover, most managers tend to argue that some larger European businesses that have a large portion of their businesses earning overseas are currently attractively valued.”
Therefore, one of his favoured funds in the region is Artemis European Opportunities, which is managed by Mark Page and Laurent Millet. However, Conway adds that this fund still have exposure to internationally-facing stocks.
For example, its top 10 holdings include Novartis, Roche and Unilever. Nevertheless, the managers are biased towards domestic mid-caps and have decent exposure to financials.
Since launch in October 2011, Artemis European Opportunities has comfortably outperformed the sector and the wider market with returns of 56.65 per cent. It has also been one of the best IA Europe ex UK funds to preserve investors’ capital over that time with its top quartile risk-adjusted returns, maximum drawdown and annualised volatility.
The fund has an OCF of 0.87 per cent.
Conway says investors can also gain exposure to the European economy by investing in smaller companies funds as (like in the UK) those businesses tend to have more domestically-biased revenues.
Premier’s Simon Evan-Cook’s favourite in this space is the five crown-rated F&C European Small Cap fund, which is headed up by Sam Cosh.
According to FE Analytics, it has been the third best performer in the IA European Smaller Companies sector with returns of 99.79 per cent since Cosh took over the reins in November 2010. As a result, it has nearly doubled the gains of its benchmark – the Euromoney Smaller Europe Inc UK index – in the process.
Performance of fund versus sector and index under Cosh
Source: FE Analytics
However, as its benchmark suggests, the fund has a heavy weighting to the UK (close to 30 per cent) which may not suit investors who want greater control over their asset allocation.
Instead, investors may wish to consider the F&C European Small Cap ex UK fund which is managed by Cosh and Lucy Morris. However, the fund – which is £90m in size having been launched in March last year – is currently underperforming relative to both its sector and benchmark since inception
F&C European Small Cap ex UK has an OCF of 0.97 per cent while F&C European Small Cap is more expensive with an OCF of 1.83 per cent, though investors can get better deals on certain platforms.
