For investors who want to take advantage of potential gains in Europe but also include some downside protection in their portfolio, Charles Stanley’s Rob Morgan (pictured) tips the Argonaut European Alpha fund and the Standard Life European Equity Income fund as the perfect pair to play both sides of the coin.The four-crown rated FP Argonaut European Alpha fund, headed up by FE Alpha Manager Barry Norris, is Morgan’s choice for an aggressive, all-out growth punt in Europe.
The fund is heavily tilted toward financials, with more than 30 per cent invested in the sector, and stocks in the European periphery where Norris thinks greater gains are to be had.
Among the manager’s top holdings are cut-rate Irish airline Ryanair, Italian bank Intesa Sanpaolo and Gibraltar-based bank Jyske Bank.
“The manager feels the greatest earnings surprises are going to be in the periphery where there is still value,” Morgan said.
“If the recovery continues in Europe that fund will do very well. If you’re looking for a high octane fund, it’s one to go for.”
Neptune’s Rob Burnett told FE Trustnet earlier this week that a recovery in the region is “imminent” and he is backing the banks, particularly in the periphery, to take advantage of a bull run.
FP Argonaut European Alpha is part of the FE Research Select 100 list of recommended funds due to its consistent outperformance and consistent investment approach, though the research team admits the manager’s strategy will lead to some periods of underperformance.
As Morgan highlights, the manager doesn’t adhere to a specific growth or value bias, but rather alternates between the two types of stocks depending on his view of the market.
The FE Research team said: “Norris is confident the worst is behind for Europe and so has added companies that have a direct exposure to consumers such as Danish jeweller Pandora. He reckons banks are next in line to benefit from a recovery and expects a rebound from commodity-related companies.”
While the fund has struggled over the shorter term, losing 1.66 per cent over the last 12 months while the MSCI Europe ex UK index is up 11.7 per cent, it has a solid long-term track record.
Over the last five years, the fund delivered top-quartile returns in the IMA Europe ex UK sector, and since launch in May 2005, it’s up more than 100 percentage points ahead of the index with returns of 154.21 per cent.
Performance of fund, sector and index since 2005
Source: FE Analytics
According to FE Research, the fund is becoming more aggressive which could ramp up the volatility in the portfolio.
Over the last five years, the fund has been more volatile than both the sector and index, with annualised volatility of 17.91 per cent.
“Growth in Europe remains fragile and unexpected bad news could threaten the chances of analysts revising their outlooks,” the team said.
Argonaut European Alpha has ongoing charges of 0.89 per cent.
There are a number of dark clouds on the horizon in Europe, especially in the banking sector where a blow up by Portuguese bank Espirito Santo sent fears running through the market that the sovereign debt crisis was on its way back.
In order to smooth returns during troubled times, Morgan thinks an equity income fund would dovetail quite well with the likes of the Argonaut portfolio. He tips the five FE Crown rated Standard Life Investments European Equity Income fund.
The £2bn portfolio benefits from the expertise of European equity income expert Will James and has an attractive dividend yield of 3.93 per cent.
The fund aims to provide a sustainable income that is higher than the European market average in addition to some capital growth.
Morgan says these dividends will help to smooth performance in more troubled times.
“The fund should protect on the downside a bit more. It’s much more large-cap focused, with pharma and big energy companies, so there is virtually no crossover between the two portfolios,” he said.
“I suspect it would do better in a more testing environment.”
The SLI fund is also a constituent of the FE Research Select 100 list of recommended funds for its outstanding track record.
The fund has delivered top-quartile returns over three and five years and outperformed the IMA Europe ex UK Index over the last 12 months.
Since launch in April 2009, the fund made 81.4 per cent compared to 74.15 per cent from the sector.
Performance of fund and sector since 2009
Source: FE Analytics
FE Research reiterates Morgan’s view that the fund should perform well in falling markets.
“However, this also means it will underperform its peers during rallies, when investors will be focused on growth and capital appreciation,” they said.
“It has always delivered a high level of income to investors and can be expected to continue doing so in the future.”
The fund’s track record highlights its ability to protect on the downside, having outperformed its peers in the troubled markets of 2011.
In that year the fund lost 10.55 per cent while the sector fell 15.57 per cent. So far this year the fund is down 3.86 per cent, not as far as the sector which has lost 5.12 per cent on average.
In the rally last year the fund was up a respectable 22.77 per cent, slightly lagging the sector which gained 26.13 per cent, according to FE Analytics.
Among James’ top stocks are Swiss pharma giants Roche and Novartis as well as Danish healthcare company Novo-Nordisk.
Like Norris, the manager holds Ryanair, but it’s the only stock in the top-holdings which crossover between both portfolios. SLI European Equity Income has ongoing charges of 0.90 per cent.
