Fund briefing: investing in Europe
Car manufacturer Volkswagen, Danish healthcare group Novo Nordisk, the Finnish mobile phone producer Nokia, German engineering giant Siemens and Nestle, the food producer, are among the most prominent stocks in the region.
And the most efficient way of getting access to these leading names is putting your money into one of around 100 funds in the IA Europe excluding UK sector. These funds must have at least 80% of their assets in such European equities.
UK investors have £49.1 billion in the IA Europe excluding UK sector. A further £2.9 billion is held in the IA European Smaller Companies sector, which is for funds investing at least 80% of their assets in equities of companies forming the bottom 20% of the European market.
On the face of it, investing in Europe and European Smaller Companies funds looks a wise decision because European economies have improved and the expectation is that this will continue, according to Julian Chillingworth, chief investment officer at Rathbone Investment Management.
“The wildcard for Europe is politics,” he says. “We are going to have a very noisy French election, the possibility of an early election in Italy, and then Germany goes to the polls later in the year.”
An added twist is the US presidency of Donald Trump. “The markets will worry that his protectionist stance will result in a trade war,” he adds. “This would make European goods going into the US more expensive – and this could prove quite painful.”
It is at the forefront of people’s minds. Analysts following Heineken, the Dutch beer giant, have already been speculating what impact the new US President’s attitude towards Mexico would have on business, considering Mexico is one of the company’s key markets.
No one knows Trump’s policies
Political ramblings play on the minds of investors, but you need a sense of perspective, according to Stephen Macklow-Smith, who co-manages the JPMorgan European Investment Trust. On Donald Trump, for example, it’s not yet clear what policies he will follow.
“Over the longer term, the story for equities is about fundamental qualities of stocks, and Europe sells products to the US because there is demand,” he says.
“The reason BMW and Mercedes sell is because they make very good cars – and I don’t see that changing.”
Click on the table below to enlarge:
The biggest risk is that one of these election results ends up contributing to the break up of the European Union or the Euro currency – and that’s putting a dampener on these markets, points out Adrian Lowcock, investment director at Architas.
“It means markets aren’t really going anywhere, even though the economic data and valuations suggest it’s a lot more positive,” he says. “No one knows what the outcome will be, but for a brave investor this could be quite an attractive entry point.”
Anyone venturing down this road must just accept that alongside the potential gains will be huge amounts of volatility. “If you’re a long-term investor and look beyond the political risks, then it might be attractive,” he says.
“Whatever happens to the European Union and the Euro currency, a lot of these companies are global players that have been around a long time and will survive.”
Investors who have put their faith in European funds have been decently rewarded, with the average portfolio in these sectors being up around 30% over the past year, according to figures compiled by Morningstar to 10 February 2017.
However, the gains achieved are overshadowed by returns from rival areas such as IA North America, IA Japan and IA Asia Pacific excluding Japan, which are up more than 45% over the same period. IA North American Smaller Companies, meanwhile, has risen 60%.
It is also worth bearing in mind that average figures only tell half the story. For example, there is a wide disparity in the performance of individual funds in the IA Europe excluding UK sector when you analyse the one-year figures. While the best funds in the sector actually returned 50% over the 12 months, the worst were only up a meagre 10%. This shows – as is always the case – investors need to choose which fund to back very carefully.
The reality is there are huge differences in terms of the number of stocks held, the amount of divergence from European benchmarks, the types of companies they invest in, and even whether they are aiming to achieve growth, income – or a combination.
Crucially important is having an understanding of the funds they’re investing in, including the approach adopted and the risks taken. This will give you an idea of the market conditions in which the fund is likely to do well – and struggle.
While recent performance is no guarantee of future success, it is always reassuring to see that the manager at the helm has a good, long-term track record of delivering strong returns in a variety of economic environments.
Fund to watch:
A very experienced hand when it comes to European companies, Alexander Darwall (above) has been running the Jupiter European Opportunities Trust since November 2000.
His approach is to look for those with proven business models whose products are in universal demand and not particularly price-sensitive. All the holdings in the trust benefit from multi-year structural growth drivers such as changes in regulation, consumer habits and technology.
The top 10 holdings in the fund account for 75% of assets under management, the largest of which is the 10% in Syngenta AG, the Swiss producer of agrochemicals and seeds, according to the most recent fund fact sheet.
Other prominent names include Experian, the credit checking agency; Inmarsat, which offers fixed and mobile communications for the maritime industry; and Wirecard, a leading payment processing specialist.
As far as sectors are concerned, its largest position is the 28% in industrials, followed by the 25% in health care and 19% in consumer services. Other exposures include financials (17%), basic materials (11%), telecommunications (6%), technology (5%) and consumer goods (3%).
Is this area right for me? Consider investing in contrarian funds if:
- You believe Europe will continue to offer strong returns.
- You want exposure to large European brand names.
- You are looking to diversify your portfolio.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).