Investors who are optimistic on the economic outlook for Europe should consider the Neptune European Opportunities fund, according to analysts at Brewin Dolphin, while those with a more cautious view might be interested in Threadneedle European Select.
Europe is rarely far from the investment headlines, as the region is seen as being one of the remaining pockets of value among global equity market but has significant headwinds overshadowing it such as the Greek finances problem and continued economic weakness.
Concerns over the future of the eurozone, economic malaise and the region’s large debt burden has prompted investor caution over recent years and means the MSCI Europe’s 58.35 per cent return over five years is significantly below the gains of both global and UK equities.
Performance of indices over 5yrs
Source: FE Analytics
However, sentiment towards Europe has been improving more recently after the European Central Bank (ECB) finally embarked on an ambitious quantitative easing programme and investors sought out value in the wake of increasingly expensive market valuations.
The latest Bank of America Merrill Lynch Global Fund Manager Survey found that a net 49 per cent of asset allocators with a worldwide mandate are now overweight Europe. It is also the region that fund managers want to be overweight over the coming 12 months.
Retail investors are also returning to the asset class. Figures from the Investment Association shows funds in the IA Europe ex UK sector captured £397m in net retail inflows during March while a net £179m went into IA European Smaller Companies funds.
Meanwhile, fund flow data from Bank of America Merrill Lynch and EFPR Global shows that European equities remained one of the most popular areas among investors last week with a net $1.6bn worldwide heading into funds focused on this part of the market.
Tom Jemmett, fund analyst at Brewin Dolphin, said: “In a week where the headlines where dominated by the escalating standoff between Greek officials and their German counterparts, it is perhaps surprising that European equities received the bulk of investor flow.”
“This highlights the sanguine positioning investors are taking against the possibility of a ‘Grexit’ from the eurozone and raises an important question; are we being too complacent? Whilst it is still our opinion that a deal is most likely, the risks are not negligible. However, against this uncertain political backdrop, we believe financial conditions are tangibly improving in the region.”
Brewin Dolphin highlights two fund picks for investors interested in European equities: Threadneedle European Select for those favouring a cautious approach towards the region and Neptune European Opportunities for those who are more bullish.
Jemmett said: “For investors wishing to take a fresh look at the European equity sector, but in a more risk constrained framework, we recommend the Threadneedle European Select fund.”
“The manager, David Dudding, adopts a strong focus on companies that can generate a superior return on capital invested over the long-term. This will lead the manager to invest in defensive quality companies and away from the more cyclical sectors like the peripheral banks, however the relative valuation premium should reflect this.”
Since Dudding took over the fund in July 2008 it has made a first-decile total return of 115.21 per cent, more than double the gain of its FTSE World Europe ex UK benchmark and its average peer. Over this time, it’s the fourth highest returning fund in the sector.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Dudding tends to buy businesses that having strong pricing power and operate in sectors where it is difficult to compete in, giving the fund a tendency to invest in sectors such as pharmaceuticals and chemicals rather than banking.
Threadneedle European Select is overweight consumer goods, healthcare and basic materials, with top holdings including Novo Nordisk, Bayer and L’Oreal, while it is underweight financials, telecommunications and oil & gas.
The FE Research team, which has the fund on the Select 100, said: “Dudding has stuck to his process and has a simple approach which has proven itself over the course of a whole market cycle. The focus on quality should help the fund if the economy in Europe worsens.”
Investors with a more cautious mindset may also find some of the fund’s other metrics attractive. Over the manager’s time on the portfolio, it has the sector’s lowest annualised volatility at 16.82 per cent, its fourth best maximum drawdown at 23.07 per cent and the third highest Sharpe ratio at 0.53.
Threadneedle European Select has an ongoing charges figure (OCF) of 1.06 per cent.
Jemmett said: “For investors comfortable taking on cyclical risk, we recommend the Neptune European Opportunities fund.”
“The fund is highly geared into a domestic recovery in peripheral Europe, with a large overweight to Italian banks so should stand to gain from accommodative ECB policy. The fund will have significant sector bets so risk on an absolute, as well as relative, basis will be high.”
Neptune European Opportunities, which is headed up by FE Alpha Manager Rob Burnett, has 27.5 per cent of assets in Italian equities and 9.8 per cent in Spain, with financials being the largest sector weighting at 34.4 per cent. Top holdings include Banca Popolare dell’Emilia Romagna, Peugeot and France Telecom.
The fund’s aggressive positioning means it is underperforming both its average peer and the MSCI Europe ex UK index over one, three and five years. However, its long-term track record remains strong and it is first quartile since Burnett took over in May 2005 with a 172.56 per cent total return.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Square Mile, which gives the fund an ‘A’ rating, said: “This is an ambitious fund that at times can take aggressive positions. When these positions come good, returns can be impressive for holders of the fund; conversely the potential for return shortfall is significant.”
“Burnett seems well suited to this approach, and he is a conviction investor who takes input from both macro and micro economic sources.”
Neptune European Opportunities has a clean OCF of 0.85 per cent.
