Favourite funds to play a European renaissance
European economies have had a tough time recently, having been singled out as the global laggards when it comes to growth.
Proclamations of doom were made at the start of the year, when fears grew that the euro area could be heading for a recession.
But there are signs, particularly in the advanced markets that have slowed the most, that things could be turning round.
Data shows that the Eurozone economy grew by 0.4% in the last quarter, which was faster than expected, and some economists think the region will pick up and avoid being pulled into the downturn facing developed economies elsewhere in the world.
An easy way to access this European renaissance is through investment funds. But where to begin?
Ryan Hughes, head of active portfolios at AJ Bell, prefers to pick fund managers who have been there and done it, something which can be particularly important when holding a fund for the long-term.
Growth in European countries typically goes in cycles, so having a steady hand in charge of a fund who’s been there before, during and after the global recession for example, can certainly be a wise move.
Hughes says: ‘If you have a manager with only three years’ experience, we’ve been in a bull market for the last 10 years. If we have another downturn, how will they perform? Will they stick to their approach or will they start panicking? We don’t know how they would perform under pressure.’
Here are four funds that AJ Bell has picked on its favourite funds list in the Europe (ex UK) sector.
FP Crux European Special Situations (BTJRQ06)
Three-year annualised return: 9.99%. Benchmark: 8.1%
Hughes says this fund is his number one pick in the sector, mainly because the fund’s manager is hugely experienced when it comes to European companies, and has a deep knowledge of the ones he invests in.
The fund looks to invest in European companies (excluding the UK) which are in what is called ‘special situations’, i.e. something atypical that has happened which means they are now unpopular with investors.
The idea is that the underlying investment case for these unloved companies, across the market cap spectrum, remains strong and there is therefore potential for the share price to grow significantly if and when they turns things around.
Hughes believes the fund’s manager, Richard Pease, is better than most at finding these companies on the European mainland.
He says, ‘We like the manager, Richard Pease, who has been doing this for 30 years. He invests nothing like the index, he likes companies with managers that have been at the helm for a long time.’
Schroder European (0764812)
Three-year annualised return: 9.46%. Benchmark: 8.1%
Different to the other European funds on AJ Bell’s favourite funds list, the Schroder European looks only at large cap companies, stays relatively close to its benchmark index, and has a big team of analysts supporting manager Martin Skanberg.
The fund aims to find undervalued stocks that have the ability to grow regardless of the prevailing market environment, and Skanberg looks to identify 20 new ideas to invest in each year to keep the competition for capital strong, hence the need for a big analyst team.
Its one-year performance has been ‘dire’ according to Hughes, with a one-year annualised trailing return of -8.25%, much worse than the others on the list, but says that’s fine for now because ‘it will do well when value is in favour’.
Baring Europe Select Trust (B7NB1W7)
Three-year annualised return: 13.51%. Benchmark: 12.29%
Unlike the BlackRock and Schroder funds, this fund has a much smaller team, led by manager Nick Williams – who has around three decades’ experience in the field – and two co-managers as well as a dedicated analyst.
But that seemingly hasn’t had any negative impact on returns, and the fund has performed better on an annualised three-year basis than the other Europe-focused funds on the list.
What it lacks in team size it more than makes up for in holdings, with the portfolio typically comprising 80 to 110 stock positions, which at the higher point can be more than double the other funds.
With a focus on small caps, it may look a little more risky, but its geographic split is across a number of wealthy, developed European countries, and Hughes says the fund doesn’t go after the ‘racy, high risk’ end of the market. ‘These are high quality, if a little boring, companies that have already made a profit,’ he adds.
BlackRock European Dynamic (BCZRNN3)
Three-year annualised return: 12.93%. Benchmark: 9.05%
Described as a ‘go anywhere’ fund, a strategy which theoretically allows managers to pick the best investments instead of being pigeon-holed into certain regions, sectors or company sizes, this fund certainly ignores its benchmark.
Run by manager Alister Hibbert and supported by an extensive team of analysts and portfolio managers, the fund’s holdings display characteristics of both growth and value investing, and are based on growth potential, conviction and the chances of the anticipated returns actually materialising.
Because its portfolio can be very different to the benchmark, it’s worth noting the fund’s performance can be volatile.