Europe is the main active theme Skerritts Wealth Management’s Andy Merricks is playing at the start of 2017 as European elections will not have the impact that many think. 
“We think that the European elections are a bit of a red herring,” the head of investments said.
Many managers and industry experts remain concerned about European politics, ahead of the first French presidential ballot in April and German parliamentary elections towards the end of the year.
While populist political parties and politicians are unlikely to have a big impact on results, many fear that after the Brexit result and Donald Trump’s victory in the US general election last year, anything is possible.
Indeed, earlier this week, Bob Michele, global head of fixed income at JPMorgan Asset Management, said: “To me the biggest question out there is the elections coming up in Europe – especially the French elections.”
However, Merricks said: “We don’t think that you are going to see a ‘Frexit’ or a ‘Grexit’ or ‘Itexit’ or whatever prefix you want to put on ‘exit’.
“And because Europe is an obvious threat I think it will do very well by the end of this year relative to other markets.
“Where we’re concentrating is European smaller companies. They tend to be more domestically-focused so if Trump continues with his de-globalisation, protectionist-type policies then the domestically-focused companies will do better than the internationally-focused companies.”
However, he notes that it is one that “we are prepared to change our minds on pretty quickly if we have to.”
Below, we look at three funds Skerrits is using for exposure to European smaller companies, starting with F&C’s £371m European Assets Trust, run by FE Alpha Manager Sam Cosh.
“It’s not had a great year but, because of that, it is trading on around about a 7 per cent discount,” Merricks said.
“So if we are right about the discount in general closing for European versus other developed markets then if you can buy the discount you get a better overall return.”
Over five years, the trust has returned 155 per cent, 46.62 percentage points ahead of its benchmark, however over the last year it has struggled, returning just 12.9 per cent.
Performance of trust vs benchmark over 5yrs
Source: FE Analytics
“It’s not had a great spell but it’s quite a focused investment trust and if you buy the European smaller companies’ story then that can be one that offers a little bit of something different,” Merricks said.
In its latest factsheet, fund manager Cosh said: “The outlook for European smaller companies looks attractive given the improving economic activity in the region.
“Additionally the prospect of deflation appears to be diminishing which is encouraging investors to reassess their exposure to ‘bond proxies’ which are valued excessively, and look towards stocks which can benefit from improving growth and bond yields, where valuations are far more attractive.”
The trust is 33 per cent invested in industrials, 24.8 per cent in consumer goods and 15.7 per cent in financials, and its largest country holding is Germany (19.7 per cent).
The trust is on a discount to net asset value (NAV) of 7.2 per cent, is not geared, has a dividend yield of 6.4 per cent and a clean ongoing charges figure of 1.09 per cent.
Another option for investors is the JP Morgan European Smaller Companies strategy, which investors can access through either the investment trust or the open-ended structure.
“They’ve not had a great year but JP Morgan in the European smaller companies sector have always been quite strong,” Merricks said.
Investors would be better in the investment trust if history is anything to go by – though past results cannot be taken as a path to future gains.
As the below graph shows over the past decade the £513m JP Morgan European Smaller Companies Trust has returned 34.44 percentage points more than the £174m JPM Europe Smaller Companies unit trust.
Performance of fund and trust vs benchmark
Source: FE Analytics
While the unit trust is also below its benchmark over the past 10 years, it has performed better in recent times and is a top quartile performer in the IA UK European Smaller Companies sector over one, three and five years and has also beat its benchmark over these periods.
Conversely, the investment trust has struggled more recently, returning 18.17 per cent over the last year, compared to 31.78 per cent for the OIEC and 33.55 per cent for the Euromoney Smaller Europe index.
Both vehicles are run by Francesco Conte and Jim Campbell and have similar sector weighting sizes though they have different holdings, with only three stocks – Datalogic, Trigano and Ipsos – present in both top 10 holdings.
The unit trust has a 0.68 per cent yield and an OCF of 0.93 per cent while the investment trust yields 1 per cent, has an OCF of 1.27 per cent, and is on a 16.4 per cent discount to NAV with 6 per cent gearing.
The final option Merricks is using is the €263m Old Mutual European Smaller Companies run by Ian Ormiston.
It has a much shorter track-record than the previously mentioned funds, having launched in November 2014, but has been the third best performer in the IA European Smaller Companies sector over this time.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“Another fund that we quite like is the Old Mutual European Smaller Companies because the manager of that used to run the Ignis Smaller Companies when that was performing well and so far this has been ticking over quite nicely,” Merricks said.
Indeed, since launch the fund has returned 69.97 per cent: ahead of both the sector and benchmark by 14.22 and 17.74 percentage points respectively.
The fund has an 18.2 per cent weighting to German stocks, with 17.1 per cent in French holdings, while its biggest sector allocation is to consumer discretionary companies (23.1 per cent).
The fund has an OCF of 1.26 per cent.