Yesterday’s news that the European Central Bank (ECB) wouldn’t pump a greater amount of money into the economy each month disappointed many investors and the FTSE dipped as a result.
However, Draghi did pledge to continue quantitative easing until March 2017 or beyond, which is at least six months longer than the original deadline, and cut the region’s deposit rate in an attempt to boost the eurozone’s recovery.
European equities have been one of the best performing asset classes in 2015 despite issues surrounding the Greek debt negotiations and many market commentators expect another strong year for the continent’s market in 2016.
Now the ECB has committed to its quantitative easing programme, the odds are European equities will make further gains from here so we’ve asked a panel of investment professionals to give their fund picks a liquidity-fuelled rally.
Jason Hollands (pictured), managing director at Tilney Bestinvest, says that for investors looking to buy into a big brand fund, Threadneedle European Select could be set to benefit from an EU rally. 
“This has long been one of our highest rated, core European equity funds,” he said. “It is a concentrated portfolio of circa 40 mostly larger European companies, with strong competitive advantages, recurring revenues and consistent above average earnings growth.”
“Well recognised brands often fit this profile and constitute a large proportion of the portfolio. These include Unilever, whose diverse brands include Marmite, Wall’s ice cream, Persil and PG Tips; Richemont, whose luxury brands include Cartier, Jaeger-LeCoultre and Montblanc; and brewer Anheuser-Busch InBev which is in the midst of a mega merger with SABMiller.”
The £2.9bn fund has been managed by FE Alpha Manager David Dudding since 2009, and over this time frame, has returned 113.49 per cent, more than doubling the performance of its IA Europe ex UK sector average and FTSE World Europe ex UK benchmark.
Performance of fund vs sector and benchmark over management tenure
Source: FE Analytics
The fund is almost fully invested, holding just 0.5 per cent cash, and has its largest proportion of stocks in the consumer products sector at 27.1 per cent. The other sectors it is invested in are health care at 23.4 per cent, industrials at 4.6 percent, and smaller weightings in financials and services.
Threadneedle European Select has a clean ongoing charges figure (OCF) of 1.06 per cent and yields 1.3 per cent.
Neptune European Opportunities
“The immediate market reaction following today’s ‘underwhelming’ ECB announcement is totally in keeping with recent investment behaviour,” Ben Gutteridge, head of fund research at Brewin Dolphin, said.
“By falling short of expectations, the market is highlighting an investor addiction to central bank asset purchases (QE), with stocks and bonds selling off aggressively and the euro appreciating.”
“One explanation for this effect is that with the ECB’s reduced commitment to buy government bonds (relative to expectations) so their prices have fallen, and longer dated interest rates have moved higher. This larger discount rate reduces the current value of future cash-flows, weighing on asset prices generally.”
Despite this, he says that as the dust settles investors might start to recognise the benefits of a steeper yield curve for banking profits – by increasing longer-dated interest rates, banks can command more margin on their loans, which acts as an incentive to extend more credit.
“In a more profitable environment for banks we would recommend the Neptune European Opportunities fund, a strategy which is firmly overweight retail banking,” Gutteridge added.
Managed by FE Alpha Manager Rob Burnett, Neptune European Opportunities has a 36 per cent weighting in financials, as well as a hefty 29 per cent weighting in telecom, media & technology.
This £475m fund also has a concentrated portfolio of between 40 to 60 stocks, and aims for growth via global-facing companies in Europe excluding the UK.
Performance of fund vs sector under Burnett
Source: FE Analytics
Over the last five years, the fund has underperformed its sector average and benchmark by 19.96 and 9.41 percentage points consecutively. However, it is comfortably outperforming since Burnett took charge in May 2005.
Neptune European Opportunities has a clean OCF of 0.85 per cent and yields 1.58 per cent.
Edinburgh Partners European Opportunities
This offshore fund was chosen by Premier’s Simon Evan-Cook, who bought into it for the first time during the last financial quarter.
“If you assume that value stocks are going to be better than safer growth stocks, though that might not necessarily be the case, then Edinburgh Partners European Opportunities is our value option within Europe,” he said.
“It’s had a tough year so far, but it stands a good chance of it catching a rebound in sentiment.”
The £200m fund was launched more than a decade ago by lead manager Dale Robertson, who has since been joined by Craig Armour and Gary McAleese in 2011.
While it is in the bottom quartile over the last year, it has performed well during the bear markets of 2008, 2011 and 2013, and has significantly outperformed its sector average and benchmark over the last decade.
While EP European Opportunities has returned in excess of 100 per cent, its sector and benchmark lagged behind by 37.21 and 16.99 percentage points respectively.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Robertson aims for real long-term growth throughout undervalued stocks. Regionally, the fund’s largest weighting is in Germany at 18.5 per cent, followed by France at 16.3 per cent, Switzerland at 14.1 per cent and Italy at 13.1 per cent. It also has smaller weightings in Netherlands, Finland, Spain and Sweden among others.
Edinburgh Partners European Opportunities has a clean OCF of 0.84 per cent.
Argonaut European Enhanced Income
This five crown-rated fund has been managed by Oliver Russ since launch and was picked by Ben Willis, who is an head of research at Whitechurch Securities.
“The two main reasons I’ve chosen this fund are that bond yields are going to remain compressed, meaning equity income will remain in demand with bond yields so low. In addition, the fund hedges out currency and further stimulus is likely to keep the euro weak,” he said.
As the name suggests, the fund aims to achieve a high income yield (by writing covered call options) as well as some capital growth, and does this through a concentrated portfolio of 47 holdings.
While it underperformed in 2012 and 2013, it has more than made up for this with a top-decile total return of 64.74 per cent over five years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Also, despite the period of underperformance, it is in the top decile for its annualised volatility Sharpe ratio and maximum drawdown over the same time frame.
Argonaut European Enhanced Income has a clean ongoing charges figure of 0.96 per cent and yields 3.58 per cent.
Neil Jones, investment manager at Hargreaves Hale, would go down a different route from the aforementioned investment professionals and opt for a REIT to utilise the continuation of QE.
“For a start, I feel the underlying illiquid nature of property suits the closed-end structure of REITs, plus there are some attractive options at the moment,” he said.
“We saw property prices remain strong in both the UK and US during their own period of QE, so with further stimulus in Europe, demand should be strong. We prefer to target holdings with industrial and office exposure.”
As such his preferred option would be Hansteen Holdings, which invests in both UK and continental European industrial property.
The properties it holds (it currently has 538 in the portfolio) are chosen for a combination of strong occupancy rates and high yields, and the team finds a majority of these in Germany, the UK, Belgium and the Netherlands.
“Hansteen have a strong presence in the Benelux countries. The experienced management team should be well placed to take advantage of opportunities created by QE, with the dividend having grown consistently over recent years and now stands at around 4.5 per cent.”
Since its launch in 2005, the £835m REIT has returned 44.82 per cent.
Performance of trust since launch
Source: FE Analytics
Hansteen Holdings is trading on a 15.16 per cent premium and yields 4.39 per cent.