Morgan (pictured) says that UK funds cannot offer the industrial and luxury goods companies that are available on the continent and that for this reason, funds that invest in Germany and other northern European companies have a lot to offer. "In terms of having a diversified portfolio, it’s definitely worth holding a European fund and you can get exposure to areas in Europe you can’t get in the UK to the same degree," he said.
"Large industrial stocks are well represented in Europe but not so in the UK. In the mid cap sector you get them, but not the large firms."
"The car industry is the most obvious example and you have lots of engineering firms as well, so it’s still quite a nice area."
Morgan says that many of the top managers in the region have been using these companies to do well in a poor overall market.
"The European funds that have done well over the past few years are those that have embraced industrial businesses," he said.
Investors can benefit from this theme through investing in the Baring German Growth fund, which, as the name suggests, focuses exclusively on Germany.
FE Alpha Manager Robert Smith’s £311m fund has made 126.62 per cent since he took over in November 2008.
Over that time, the German stock market, measured by the DAX index, has made 80.46 per cent.
Performance of fund vs index since Nov 2008
Source: FE Analytics
This is substantially higher than the 78.35 per cent made by the average IMA Europe ex UK fund over this time – although Baring German Growth sits in the IMA Specialist sector.
Smith's fund has 28 per cent of AUM in industrials, including 8.6 per cent in engineer Siemens, 6.1 per cent in chemicals giant BASF and 3.1 per cent in Volkswagen.
Smith told FE Trustnet in a recent interview that German corporates were prospering from weakness in the eurozone as it made their products cheaper for the Americans and the Chinese.
Problems in those economies would hit his fund harder than problems in Europe, he explained, as they are crucial markets for German industry.
Smith points out that many general European funds were hit hard when the Italian market dipped following the inconclusive elections earlier this year, and he says that a broader European fund is exposed to more risk than a German-focused portfolio such as his.
However, Morgan suggests that investors should still go for a broader fund.
"What people always want when they invest in Germany is that industrial growth coming through, and other parts of Europe do that sort of industry as well: much of Scandinavia is in good health and the Swiss are doing well," he said.
"A lot of funds have focused on northern Europe rather than the olive belt."
"Although the fund [Baring German Growth] has done very well, it’s probably a step too far in terms of buying a single-country fund instead of a broader exposure."
Morgan says that Alexander Darwall, who heads up Jupiter European, and Richard Pease, who runs Henderson European Growth, are two managers he likes in the sector.
Data from FE Analytics shows that both have 35 per cent invested in industrials.
FE Alpha Manager Richard Pease has run Henderson European Growth since 2001. He was joined by FE Alpha Manager Simon Rowe in 2009.
The £937m fund has five FE Crowns and is in the sector’s top quartile over one and three years.
Pease also runs the £674m, five crown-rated Henderson European Special Situations fund.
That portfolio has outperformed over three years, making 49.78 per cent against the growth fund’s 37.61 per cent.
Performance of funds vs sector and benchmark over 3yrs
Source: FE Analytics
"Both managers aim to buy smaller, family-owned companies and they are areas that have done very well in Europe," Morgan added.
For investors looking for exposure to Germany in particular, data from FE Analytics shows that 39 of the 107 IMA Europe ex UK funds have more than the benchmark's 20 per cent in the country.
Henderson European Smaller Companies has 36.6 per cent in Germany, although its performance relative to other funds in the sector has been disappointing.
Over three and five years it is fourth-quartile in the IMA European Smaller Companies sector, with returns of 27.74 and 8.26 per cent respectively.
IM Argonaut European Alpha, run by FE Alpha Manager Barry Norris, has 34 per cent in the country.
The £210m fund, which has five FE Crowns, has returned 22.68 per cent over the past five years, putting it just outside the top quartile of performers over this time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund is actually underweight industrials compared with the index, however, although only by 1.5 percentage points.
