Euro fears present buying opportunities

Strength in the corporate sector will create attractive buying opportunities in Europe if sentiment dips, according to newly appointed FE Alpha Manager Will James.

The manager of the Standard Life Investments European Equity Income fund believes that the volatility being seen in the European equity market is at odds with the improving fortunes of individual companies.

“Deleverage and austerity are likely to cause headwinds for investors but at the company level balance sheets are in good shape, earnings growth is robust and dividends are well covered,” he said.

“There will be plunges and bounces as we move along but ultimately we expect a good upwards trend. The market is beginning to reflect some of the comfort people have in the economic outlook. We will see the dips as opportunities to top up exposure to companies we like.”

Markets stuttered through 2011 but James insists that provided investors are patient, value should assert itself in the long-run.

“It’s going to be difficult for markets to make any headway in the medium term. Business cycles have shortened and this means that investment horizons need to be lengthened.”

“Trying to invest in Europe with a macro overlay is incredibly difficult given the unpredictability of the debt crisis. Outperformance has come from good stock-picking and identifying companies that are in the best position to remain competitive.”

The Standard Life Investments European Equity Income fund has just celebrated its three-year anniversary – an important benchmark for IFAs who rely on a reasonable track record before allocating to a fund.

Data from FE Analytics shows that the fund has returned 39.94 per cent over the last three years compared to 33.88 per cent from the average fund in the Europe ex UK sector. Over the last year, it has achieved top-decile performance losing just 4.18 per cent versus a loss of 11.65 per cent from the sector average.

James says that the success of the fund comes down to the way in which funds are allocated.

“Income is the starting point for absolutely every decision I make and company meetings are at the heart of the investment process,” he said. “50 per cent of the fund is focused on companies with high dividends that meet the yield target, 35 per cent is focused on names with good dividend growth characteristics and the remaining 15 per cent comprises unloved names where we think there is a likelihood of a dividend re-rating.”

“Each portion of the portfolio addresses a different market condition and when one area does well it is a good signal to take profits.”

One name that typifies the contrarian dividend upgrade portion of the portfolio is Ryanair.

“Ryanair is not a company that you expect to pay a dividend but it has very good balance sheets and a young fleet,” explained James. “Flag carrying airlines in the peripheral countries of the Europe are running into trouble and Ryanair has added destinations in these regions to pick up capacity.”

“Strong cash generation from these routes is leading to positive dividend surprises. There has already been one special dividend of 10 per cent and we expect more to come because [chief executive] O’Leary has shown reluctance to purchase more aircraft.”

Our data shows that the fund is also less volatile than the average fund in the sector and a good deal less volatile than the majority of its income focused competitors.