All bets are on Europe

As the summer comes to an end and the investment industry starts to pick up pace again, the race is on to pick the next top-performing sector.

A retrospective look at the top 10 performing unit trusts over the past year might suggest smaller companies or healthcare are the way forward.

Framlington Health still leads the performance tables with a return of 188 percent followed by Artemisand Murray&#39s UK smallercompany funds.

But a new survey commissioned by Schroder last week reveals 90 per cent of IFAs are putting their money on Europe and for once it would seem the rest of the industry is in agreement.

HSBC European growth fund manager Chris Rice says: “In the 1980s it was Japan, in the 1990s it was the US and in the Noughties I think Europe is set to be the place to invest.

“We are in a sweet spot for European corporate earnings at the moment and we believe that is set to continue over the next year. Corporate earnings are growing at 20 per cent, which is better than anywhere else in the world.”

The evidence for continued corporate growth is certainly compelling. Corporate restructure is sweeping Europe at a phenomenal rate, with comp-anies constantly enhancing efficiency and expanding profit margins as a result.

Much of this restructure has been fuelled by continued consolidation.

Plan Invest director Michael Owen sees the potential number of European mergers and acquisitions as the main driving force behind the fast pace of change in Europe.

He says: “If you need an example, look at something like the tractor industry. In Europe there are around 20 or so companies which produce tractors, whereas in America there is now only one. The motor industry is another example where consolidation is inevitable.

“I have always been heavy in Europe but there is no doubt it is going to be a particularly important area for investment in the coming year.”

Although Europe has the potential for growth across the board, much of its short-term prospects are based on the success of a couple of highly advanced sectors. Europe remains a world leader in telecoms and is about five years ahead of the US in the use of mobile communications.

The oil and information technology sectors are others that are experiencing growth.

But in recent months, it has been the weak euro which has made a substantial contribution to European success.

Although a weak euro is a drag on sterling fund values, the boost to European industry has more than offset this.

In terms of individual markets within Europe, changes in Germany have made it an interesting country to watch. The recently passed tax reform bill, which reduced corporate tax as well as personal income tax, will stimulate German investment.

On a more general note, Europeans have just 28 per cent of their pension funds invested in equities compared with 70 per cent in the US and UK. This clearly leaves plenty of potential growth in the European equity markets.

The results of the past few years already show promising performance in European funds. A £1,000 investment in Invesco&#39s AAA-rated European growth fund one year ago would now be worth £1,645.

Gartmore&#39s AAA-rated Euro- pean select opportunities fund is another popular choice with IFAs. A sum of £1,000 invested in the fund three years ago would have returned £2,160.

Looking forward, Investec&#39s European fund, managed by star fund manager Albert Morillo, appears to have strong prospects. Morillo manages the fund for American fund managers Black Rock but its retail side is promoted through Investec in the UK.

Having made his name in the Scottish Widows Euro-pean fund, he moved to Black Rock in January. But since then, Morillo has managed to live up to his strong repu-tation, already turning the fund into the top performer in its sector over three months.

Contrary to the general feeling of optimism towards Europe, Morillo predicts a slowdown in growth between now and the end of the year but remains confident about the general economic background.

Bates Investment senior analyst James Dalby likes Schroder&#39s European growth fund. He says: “The fund has had a change of manager this year and its got itself back up to average since Mark Pignatelli took over.

“We think it could become a core European holding. It isn&#39t too high risk, like some of the other European funds, and if you are looking for a bit more flavour you can always top up your portfolio with something more exciting such as Invesco.”

With Europe now well into the longest period of sustained growth since the Berlin Wall came down 10 years ago, investment opportunities look very favourable.

Perhaps the only worry-ing indicator is that nine outof 10 IFAs have already tip-ped Europe to be the nextbig thing. Will there be enough to go round to prove everyone right?