The improving economy, attractive valuations and improving company fundamentals are some of the reasons why European equities are attractive, according to FundCalibre’s Juliet Schooling Latter.
This comes five years on from the throes of the European sovereign debt crisis, when European Central Bank (ECB) governor Mario Draghi delivered his famous “whatever it takes” speech to save the eurozone from collapsing.
The director of FundCalibre pointed out that, had investors believed Draghi and maintained their conviction, they would have been well-rewarded.
Over five years, the MSCI Europe ex UK index has outperformed the FTSE All Share index by 43.21 percentage points with a total return of 109.12 per cent.
Performance of indices over 5yrs
Source: FE Analytics
“Having worried about deflation for most of the past five years, inflation in the eurozone is now coming through,” Schooling Latter said. “At the same time, consumption is rising, employment numbers are improving and the economy has started to grow.”
“First quarter company reporting was encouraging to say the least. Earnings upgrades were plentiful and, perhaps even more significantly, earnings expectations for the rest of the year are improving.
“This is a reversal of the trend we've seen for the past six years or so, when expectations declined rapidly over the course of each year.”
Not only this, the director said European equities are more attractively-valued compared to other developed equity markets and their own bond market.
“Bond yields are already very low. With the possibility that the ECB's nine-year rate cutting cycle could soon be at an end and the bond buying programme due to start tapering at the end of the year, an investor rotation from bonds to equities could be on the cards,” she added.
However, there are still some factors investors should take into consideration before increasing their exposure to European equities.
For instance, Schooling Latter said the eurozone may not be out of the woods yet when it comes to political risk, despite the election of “business-friendly” Macron in France and the potential re-election of Merkel in Germany.
“If we have learned anything in the past couple of years it is that we shouldn't be complacent when it comes to the populist vote, and there is a potential Italian election on the cards next year,” she warned.
Not only this, the director pointed out that Draghi will have to begin tapering his QE programme at some point which, if 2013 is anything to go by, could cause another ‘Taper Tantrum’.
“When [Draghi] announced ‘deflationary forces have been replaced by reflationary ones’, back in June, he got a taster of what the reaction may be when he starts winding down the €60bn-a-month bond-buying programme and/or raises interest rates,” she explained.
“On the announcement, the euro rose, European government bond yields spiked and equities took a tumble.”
Bearing Europe’s attractive traits – along with some potential headwinds – in mind, Schooling Latter discusses three European equity funds that could be attractive for investors:
BlackRock Continental European Income
Headed up by Alice Gaskell and Andreas Zoellinger, the four crown-rated BlackRock Continental European Income fund is £1.6bn in size and was launched by the duo in 2011.
“This fund invests in companies of different sizes but with the similar characteristics of reliable, sustainable dividends; potential dividend growth and protection against inflation,” the director explained. “This results in an attractive yield (currently 4 per cent) and the fund being less volatile than the market and its peers.”
Over five years, the four crown-rated fund has outperformed its average peer and FTSE Developed Europe ex UK benchmark by 21.69 and 15.68 percentage points respectively with a total return of 134.59 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has done so with a top-quartile annualised volatility, Sharpe ratio (which measures risk-adjusted returns), maximum drawdown (which measures the most money lost if bought and sold at the worst times) and downside risk (which predicts susceptibility to lose money during falling markets).
Had an investor placed £10,000 into the fund five years ago, they would have received £3,216.93 in income alone.
BlackRock Continental European Income has a clean ongoing charges figure (OCF) of 0.93 per cent.
GAM Star Continental European Equity
Next up is GAM Star Continental European Equity, which has five FE crowns and was taken over by Niall Gallagher in 2009. Over the last five years, it has returned 126.5 per cent compared to its sector average and benchmark’s respective returns of 112.9 and 109.12 per cent.
“This fund invests in large companies, with the manager preferring those he believes will grow faster than the index,” Schooling Latter explained. “He aims to buy stocks at the point where they are either out-of-favour or where growth prospects are believed not to be fully reflected in the stock price.
“Meetings with industry experts and company management are of high priority.”
The Ireland-domiciled Sicav is £1.2bn (or €1.5bn) in size and is unafraid to stray from its benchmark. For example, it currently has a significant underweight to Sweden, Switzerland and The Netherlands relative to the MSCI Europe ex UK. On the other hand, it has almost double the exposure to Spain than the benchmark and holds 14.84 per cent in Irish equities, compared to the benchmark’s 0.98 per cent weighting.
In terms of its risk metrics, it has a top-quartile risk ratio, third-quartile annualised volatility and a second-quartile Sharpe ratio over five years.
GAM Star Continental European Equity has a clean OCF of 1.06 per cent.
Henderson European Selected Opportunities
The third and final fund on Schooling Latter’s list is Henderson European Selected Opportunities, which is headed up by lead manager John Bennett and deputy-managed by Asim Rahman.
“This is a high-conviction portfolio of 50-65 mega and large-cap stocks,” the director explained. “There is neither a growth nor a value bias, with the manager instead having a very pragmatic approach.
“He takes the macroeconomic environment and sector trends into consideration, as well as looking at individual companies.”
Over five years, the £2.4bn fund has outperformed its average peer by 7.04 percentage points and has done so with a top-quartile Sharpe ratio and annualised volatility, as well as a second-quartile downside risk ratio and maximum drawdown.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The three crown-rated fund has been awarded a place on the FE Invest Approved list as it is highly-regarded by our Adviser Fund Index (AFI) panel of leading financial advisers.
“It is good to see that the outperformance has been generated as promised by the process, through superior stock and industrial sector selection,” the FE Research team said. “However, this successful track record has led to significant growth in strategy assets among the four similar mandates these managers now run, and we are monitoring the situation for capacity issues.”
Henderson European Selected Opportunities has a clean OCF of 0.85 per cent.