Global income managers, such as Lazard’s Pat Ryan, are turning back to the region for undervalued and stable opportunities in the single-currency area.
"European stocks are still fairly cheap," he said. "What’s encouraging is earnings in Europe are still well below their peak. In the US, earnings have gone through that peak."
As BlackRock’s Andreas Zoellinger pointed out in a previous article, the depth and breadth of income-paying companies in Europe is far wider than that of the UK, giving managers a more diverse investment environment from which to choose solid dividend-payers.
The manager says that while there are 30 firms in the UK with a market cap of more than £1bn that are paying dividend yields of more than 4 per cent, Europe has more than triple the number of firms with the same qualities – 103 in total.
For these reasons, investors may want to consider diversifying their equity income exposure into Europe. FE Trustnet highlights three specialist funds to give you exposure to this growing theme.
Standard Life European Equity Income
Ben Yearsley, head of investment research at Charles Stanley Direct, likes the five crown-rated Standard Life European Equity Income fund, run by FE Alpha Manager Will James.
The fund is also part of the FE Select 100 list of most recommended funds.
"Europe is home to plenty of heavyweight, blue chip companies, so it’s a good hunting ground for stable dividend payers," Yearsley said.
"However, this fund’s manager, Will James, is also keen to incorporate selected companies paying low dividends in the expectation they can increase payouts rapidly. He therefore looks across the whole spectrum of the market for opportunities."
"With a concentrated portfolio of around 50 to 60 stocks, the fund has already posted some impressive returns since launch in April 2009. James and the rest of Standard Life’s European team focus on identifying corporate change, aiming to pinpoint which European firms are set to prosper most before any consideration of income yield."
"He believes this 'best ideas' approach avoids investing for the sake of yield alone, and should help avoid companies that are in decline and likely to cut their dividends."
The Standard Life fund is yielding 4.11 per cent, the highest in the entire IMA Europe ex UK sector and higher than the majority of UK equity income funds on offer.
Since launch in April 2009, the £1.7bn fund has made 83.52 per cent, edging out the FTSE World Europe ex UK index and ahead of the IMA Europe ex UK sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The highest weighting in the portfolio is to France, with French pharmaceutical giant Sanofi and financial services firm AXA in the top-10 holdings. The fund also has a significant weighting to Sweden and Switzerland. Swiss pharmaceutical powerhouse Roche is the largest holding in the portfolio.
The fund requires a minimum investment of £500 and has ongoing charges of 1.61 per cent.
BlackRock Continental European Income
Although it has a shorter track record, the BlackRock Continental European Income fund has posted solid numbers since launch in May 2011.
It is also the second-highest yielding portfolio in the IMA Europe ex UK sector, paying out 3.9 per cent.
Since launch, the fund has made 33.39 per cent, well ahead of the sector, which gained 17.72 per cent, and more than doubling the returns of the FTSE World Europe ex UK index, which made 14.16 per cent.
Unlike the Standard Life portfolio, the fund is still small so has more flexibility to look further down the market cap for income opportunities.
Managers Andreas Zoellinger and Alice Gaskell hold major blue chip European firms such as Roche and Novartis, but also allocate to Finnish lift maker Kone and Italian holding company Atlantia, which manages the toll system on motorways throughout much of Europe.
Industrials are the highest weighting in the fund, at 25.1 per cent, but financials are close behind, making up 23.3 per cent of the portfolio.
The fund has a minimum investment of £500 and has ongoing charges of 1.7 per cent.
Allianz European Equity Income
Investors looking to diversify their UK equity income exposure may also want to consider the four crown-rated Allianz European Equity Income fund, which has the third highest yield in the sector.
The fund, which has just £27m in assets under management, is yielding 3.88 per cent. While it has outperformed the sector and MSCI Europe ex UK index over the extreme short term, it has taken time to gain traction since launch in March 2009.
Over the last three years, the fund has made 30.72 per cent, slightly ahead of the sector and index, which made 30.7 per cent and 26.81 per cent, respectively.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The largest holding in the portfolio is the fund’s parent company, insurer Allianz. Royal Dutch Shell, the Austrian postal service Osterreichische Post and Telenor feature in the top-10 holdings.
It is also a highly concentrated portfolio, with the top-10 holdings making up 43.8 per cent of the fund.
The fund requires a minimum investment of £500 and has comparatively high ongoing charges of 2.29 per cent.
