Share
Euro sceptics
Kira Nickerson Investment Matters
Developed markets v emerging markets have been a key dilemma facing many asset allocators through both the downturn and the more recent rally. Many economists and managers agree that Asia and emerging markets offer the best growth opportunities but the developed markets can offer greater stability in returns.
But the argument is often much narrower than developed or emerging. For most, this debate is really about the US or UK while other developed markets, such as Japan and Europe, are largely ignored.
It is no exaggeration to say that Europe has continually been an unpopular sector for retail investors. Looking at the IMA stats on the best and worst-selling sectors in each year going back to 1999, Europe has never been a favourite for either retail or institutional buyers. But it has been the worst-selling sector in three separate years - 2003, 2004 and again in 2008. For institutional investors, Europe ex UK funds saw the most outflows of any of the sector in 1999, 2003 and 2005. There is no other fund group that appears as frequently in the worst-sellers list.
The first three-quarters of this year shows that the trend has not changed much, with Europe ex UK funds again the worst sellers by retail inves-tors three times in nine months. So far this year, it has not been the worst seller for institutional investors.
Yet performance-wise, the sector has certainly held its own and on occasion done better than most. Even with the downturn of 2008 taken into the account, returns from the average Europe ex UK fund is in positive territory - unlike the average North American or UK portfolio. Over three years to September 30, the Europe ex UK sector produced an average sterling return of 6.93 per cent while the smaller Europe including UK funds gained an average 4.98 per cent. This compares with the UK all companies return of -1.63 per cent and the North American sector average of -5.88 per cent.
The top performer in the 87-strong Europe ex UK peer group over the three-year period is the Blackrock European dynamic fund, with a gain of more than 38 per cent. The fund is managed by Alistair Hibbert, who took over the fund when he joined the group in 2008. Prior to Blackrock, Hibbert was with Swip but before then he was probably best known for having been the succeeding manager of Rory Powe on the once popular Invesco Perpetual European growth fund.
Powe is an example of how popular individual managers in this sector have been over the years. He built the Invesco fund up to £3bn in size in the late 1990s, only to then see it tumble rapidly during the tech crash. Today, the sector still has more than just a few well known managers such as James Buckley at Barings, Gartmore’s Roger Guy, Alex Darwall at Jupiter, Richard Pease at Hend-erson New Star, Neptune’s Rob Burnett, Cazenove’s Chris Rice, James Inglis-Jones and Gary West at Liontrust and Hugh Hendry at Eclectica. And the list goes on.
Yet despite the reputation of some individual fund managers, the sector remains relatively unloved. Perhaps what is so difficult about Europe for UK investors is where to place it in a portfolio. There is the inevitable domestic bias and the US is the world’s biggest economy and it does not feature the high beta growth oppor-tunities that emerging regions do, so where does Europe fit in? Europe, both figuratively and geographically, is often caught in the middle.
Premier European growth fund manager Michael Jennings says investors can sometimes confuse the economic outlook and strength with that of Europe’s stockmarkets.
He says: “Economically, yes it can lag the US but, with regards to stock-markets, it is almost the reverse. Europe is far more cyclical than markets such the UK and US, bene-fiting it in a rebound situation.”
Jennings is positive on the stock selection opportunities within Europe at the moment. “Europe is full of great, global companies in sectors such as pharmaceuticals and industrials,” he says. European companies are also priced more cheaply than many of its US count-erparts, he adds, pointing to exam-ples such as Cadbury’s v the US’s Kraft.
Royal London Asset Management head of equities Jane Coffey says of the developed markets, she currently favours Europe. She says there are many opportunities across the continent, particularly in the industrial sectors, where countries such as Germany dominate.
The problem in the UK and US is an overleveraged consumer, an issue that Europe does not have. As such, consumers are far less interest-rate sensitive and recovery will prove to be more resilient on the continent, says Coffey.
She says RLAM’s European growth fund currently favours cyclicals, including financials, with an over-weight position higher in banks than in the group’s UK portfolios. European banks ran into issues, as did other countries and regions, but Coffey says this was due more to their US exposure rather than any inherent problems they had themselves.
Liontrust’s West and Inglis-Jones note that markets in Europe made impressive gains in the third quarter, helped in part by sterling weakness against the euro. Earlier this year, the two managers shifted from growth to a value style, which they say has helped performance. “Valuation dispersions have now contracted in the market from an extreme posi-tion but remain high. This should mean that value styles continue to perform well,” says West.
Jennings says that while macro calls across all geographies have been important in the past two year, he believes the next 18 months will focus more on the micro stock selection. On this basis, Europe is a favoured area for him and within his portfolio he currently prefers larger cap, quality companies, with better visibility of earnings.
Regardless of the optimistic outlook of these European managers, retail investors still seem to shy away from this area. Perhaps they would do better to pay less attention to the investment fashion and look towards the calibre of fund managers. Europe may lack the interest of the first but it certainly has the latter in spades.
If you enjoyed this article, sign up here to receive daily email updates from Money Marketing and Follow @_moneymarketing
