Foundation Fundlist European sector review

A look at three funds offering exposure to European shares.

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  1. Rob Morgan

Europe, alongside the UK, is now one of the most out of favour investment regions. This potentially spells opportunity. There are many exceptional businesses, some of which offer specialist products and services that are hard to find elsewhere.

With such a breadth of companies identifying the best ones can be difficult. Fortunately, a number of successful stock pickers operate in the area for investors looking to maximise long term returns from the region. Below I take a look at the characteristics and recent performance of the three actively-managed European funds on our Foundation Fundlist following our recent annual review of the sector.

BlackRock European Dynamic

Manager, Alister Hibbert, has a flexible, concentrated approach and attempts to capture opportunities across a wide range of European companies. He has demonstrated an ability to generate strong performance relative to his benchmark and peers across a range of different market conditions since he started running the fund in 2008. While past performance is not a guide to future returns, we believe this is potentially one of the best means of accessing European markets for investors targeting capital growth and willing to hold for the long term.

Mr Hibbert sits within a team that we regard to be one of the most talented and well-resourced in the sector. He is focused on finding companies trading on reasonable valuations relative to history, but which also have growing earnings. Although the fund should be expected to be predominantly invested in larger companies he is also happy to venture down the size spectrum if he sees the right opportunity.

The fund has enjoyed a strong year outperforming the average fund in the sector by around 4%, thus producing an overall gain rather than a small loss, although past performance is not a guide to future returns. The fund has benefited towards industrial firms and away from financials and basic materials. Mr Hibbert has been sceptical of most European banks for some time as margins continue to fall due to a high level of competition. He has also largely avoided oil companies and the auto industry. 

Positions in Airbus, Ferrari and DSV (Danish transport & logistics) have been key drivers of returns, despite a difficult end to 2018. The fund also benefitted from the sale of tyre-maker Continental prior to its August profit warning, though positions in British American Tobacco and Danske Bank were unhelpful.

Overall, Mr Hibbert is confident markets can make further progress this year but watchful of the picture deteriorating. Given its importance to Europe’s export sector, he monitors China closely for evidence of problems, but currently he doesn’t see anything unduly concerning.

BlackRock Continental European Income

The fund, like a number of income-orientated European investments, has slightly lagged behind the wider market over the past couple of years. Investors have become increasingly sensitive towards changes in global bond yields, anticipating higher inflation and a reduction of loose monetary policy, chiefly very low interest rates and quantitative easing.

This has impacted more defensively orientated sectors such as utilities, consumer staples, health care and telecommunications that attract investors looking for a high income, while areas expected to be greater beneficiaries of global growth have been stronger.

The fund has around 60% of the portfolio invested in above-average yield stocks (insurance, infrastructure, telecoms and utilities) with dividends considered to be reliable. The rest is in dividend ‘growers’, companies which have smaller yields but are expected to grow their pay outs more rapidly. By blending these types of stocks together the managers aim to deliver a sustainable income that will grow over the longer term and support capital growth – rather than just a very high starting yield.

The focus on companies able to support a steady flow of dividends tends to make for a more defensive portfolio than its sister fund BlackRock European Dynamic. As such, as well as attracting income seekers it may be of interest to investors wishing to allocate to the region but take a more cautious view with a bias towards healthcare, consumer goods, infrastructure and utilities where reliable dividends can help drive more predictable returns. That said there are still some more exciting businesses with significant growth capability such as Novo Nordisk, the global leader in diabetes care.

FP Crux European Special Situations

Managers Richard Pease and James Milne invest for the long-term and tend to stand by their convictions, trading holdings in the portfolio only infrequently.  They are also very particular about the sorts of companies they invest in, often favouring family-owned businesses that can expand globally in niche areas without the need for external finance. They like to see healthy, repeatable cash flow from secure revenue streams and robust balance sheets.

The managers invest in a high-conviction manner away from the benchmark and search across the entire market regardless of size, including smaller companies with greater growth potential but higher risk. A relatively concentrated portfolio of around 60 holdings adds to the level of risk and means each stock idea can make a significant impact on performance.

The fund has underperformed over the past year, the defining period being the final quarter of 2018. The market falls during this time were more pronounced among small and medium-sized companies and the fund has yet to recover all the ground lost during this period.

SPIE, an energy and communications outsourcing company, performed particularly poorly in the second half of 2018 but bounced well off the bottom this year after results reassured investors.  Mr Pease continues to back the management. Meanwhile, holdings in packaging company Huhtamaki and flooring specialist Tarkett were affected by as input prices of oil and metals rose.

More positively, commercial property firm Aroundtown rose on buoyant rents and German property prices. Despite a surging share price Mr Pease remains very positive, noting that the founder owns a 35% stake and is yet to sell any of it.

European sector review

Past performance is not a reliable indicator of future returns. Figures are shown on a total return basis, bid to bid price with net income reinvested. Source: FE Analytics.

All three funds remain part of our Foundation Fundlist.

 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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