Developed markets have seen a surge unlike any other since financial markets collapsed in 2008. The blue chip S&P 500 index alone is up more than 30 per cent since the start of the year.
While few people expect the world’s largest economy to stall, multi-asset managers such as JP Morgan’s Talib Sheikh and Fidelity’s Eugene Philalithis think valuations are just too high to find the right growth and income opportunities.
Instead they are turning to Europe to find both growth and attractive dividend yields.
Sheikh (pictured), manager of the JP Morgan Multi-Asset Income fund, says his team has been rotating into European dividend-paying stocks and European sovereign debt in recent weeks.
"The JP Morgan Multi-Asset Income fund has recently added exposure to European dividend-paying equities and added exposure to European sovereign debt," he said. "We see opportunities in European equities in particular as the region recovers, and are finding interesting dividend stocks."
He says that many of the risks that have plagued Europe since markets collapsed have been mitigated – whether by Mario Draghi’s 'do whatever it takes' attitude to the single currency area or by genuine improvements to sovereign and corporate balance sheets.
The European sleeve of JP Morgan Multi-Asset Income, which was added in September, is currently the highest-yielding in the entire fund, according to Sheikh.
The manager says the team started adding positions in peripheral government bonds – in Italy, Spain and Portugal – about five months ago, but adds that the best place to be for both income and growth is equities.
"We’re at our maximum on long equities," he said. "They have the best opportunity of delivering positive returns in our investment horizon."
Sheikh says investment grade corporate debt is particularly unattractive and while he still sees opportunities in high yield debt, the team is taking profits there and reinvesting them in developed market equities, particularly in Europe.
"The fund’s high yield exposure has been reduced slightly, although we do still like high yield because the risk trade-off remains attractive due to low default rates."
"We’re taking into account the possible disruption to bond markets when the US Federal Reserve decides to begin tapering its asset purchases. To manage this, we’ve added duration hedging to the portfolio using futures to take down the interest rate risk."
Philalithis, manager of the five crown-rated Fidelity Multi Asset Income fund, says his team has also tip-toed back into Europe in the last several weeks.
"Yes – there has been a modest increase to Europe in our allocation," he said.
"Initially we added European high yield about 18 to 24 months ago, which has worked very well."
"In recent months, we have increased our allocation, mainly by allocating to dividend stocks in Europe through smart beta indices, as income opportunities were supported by our view on valuations amidst a broadening global economic recovery."
However, both managers say Europe is not devoid of risks, but rather investors are getting paid to take a gamble on the region.
"We’re getting paid for the risk we’re taking in Europe for the first time in a long-time," Sheikh said.
"Investing in Europe is not without risk. The number-one concern is that the uptick in the global economy is not sustained. What worries me is that there’s no uptick in inflation at all. It worries me that we have deflationary forces globally."
Both funds have a strong medium-term track record, outperforming their respective sectors over the last three years.
The four crown-rated JP Morgan Multi Asset Income fund made 23.86 per cent in this time, compared with 18.36 per cent from the IMA Mixed Investment 20%-60% Shares sector.
Performance of fund vs sector over 3yrs
Source: FE Analytics
It is yielding 3.89 per cent and as Sheikh pointed out, is near the top-end of its range of equities, with nearly 45 per cent in the asset class.
The majority of the fund is invested in North America, at 51.6 per cent, but Europe forms the second-highest weighting in the portfolio, at nearly 15 per cent.
The Fidelity portfolio, which sits in the more cautious IMA Mixed Investment 0%-35% Shares sector, made 21.59 per cent over the last three years, compared with just 13.57 per cent from its peers.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The fund is yielding 1.96 per cent and is also edging higher in its equity exposure. More than 20 per cent of the fund is invested in equities, while 68.4 per cent remains in fixed income.
The UK dominates the regional exposure in the Fidelity fund, but Europe is the second-highest weighting, also at nearly 15 per cent.
The JP Morgan portfolio requires a minimum investment of £1,000 and has ongoing charges of 1.43 per cent. The Fidelity fund requires a minimum investment of £1,000 and has ongoing charges of 1.97 per cent.
Global equity income managers such as Lazard’s Pat Ryan have recently told FE Trustnet they are finding some of the best opportunities in Europe.
Not all managers are following suit, however. The Jupiter Merlin team holds no European equity income funds but has some indirect exposure through the likes of M&G Global Dividend, Artemis Income and Invesco Perpetual Income.
If you wish to gain exposure to the European equity income theme in your own portfolio, click on this previous FE Trustnet article for a rundown of suitable funds.
