Aim: Income and growth by investing in European equities excluding the UK
Minimum investment: Lump sum £500, Isa £1,000, monthly £50, Isa monthly £200
Investment split: 20% financials, 14% telecommunication services, 13% energy, 10% materials, 9% consumer discretionary, 8% utilities, 7%healthcare, 5% consumer staples, 4% industrials, 3% technology, 7% cash
Isa link: Yes
Charges: Initial 4%, Isa initial 3% annual 1.5%
Commision: Initial 3%, renewal 0.5%
Tel: 0800 848 494
Allianz Global Investors’ RCM European equity income fund is an Oeic investing in blue chip companies in continental Europe that pay dividends. It has an initial income target yield of 5 to 6 per cent, along with the potential for capital growth.
Looking at how the fund fits into the market, Chadney Bulgin partner Bruce Bulgin says: “The Allianz RCM European equity income fund is designed to generate a high level of income, which can be re-invested to boost growth. The income yield, which is estimated to be around 6 per cent, is way above the amount which could be obtained from a low-risk deposit account.” However, he adds that there is clearly an investment risk associated with equity markets.
Discussing the fund’s investment strategy, Bulgin points out that Allianz believes that it is possible to identify European businesses, which are unlikely to cut dividends. An example of a stock that could deliver this level of return is BASF, a large German industrial conglomerate. Bulgin says: “BASF is currently yielding more than 8 per cent and Allianz’s fund management team claim to have a detailed knowledge of BASF’s management.”
Bulgin observes there is a detailed research process using outside information sources as well as Allianz’s own Grassroots research, which uses the company’s 35 analysts in a range of industrial sectors. “ On this basis Allianz probably has a far greater level of knowledge than that of its main competitors,” says Bulgin.
He feels that co-managers Neil Dwane and Joerg De Vries-Hippen, both have longstanding knowledge and expertise in European markets.
“An attraction of Europe is that it gives investors a much wider spread of industrial sectors than is the case in the UK. UK income funds are dominated by telecoms, pharmaceuticals and healthcare, while other major sectors in the UK are oil companies and financials. In Europe there is a far greater amount of manufacturing,” says Bulgin.
He adds that in terms of size of economy, Europe is far greater than the UK. “The indicative portfolio is likely to have its greatest weightings in Germany, France, the Netherlands and Switzerland. It is anticipated that the number of stocks will be between 30 and 60, which should mean that the fund managers will have an in depth understanding of the individual holdings,” says Bulgin.
Bulgin likes the fact that the fund should be available through most of the major platforms. “The charges are about average, with a predicted total expense ration of 1.73 per cent. For commission-based advisers the initial commission is up to 3 per cent and there is inbuilt trail of 0.5 per cent, he says.
Turning to the potential drawbacks of the fund Bulgin says: “This is a crowded sector, though the number of high income European funds is not great. In the event that Europe follows the UK then it could well be the case that dividends are cut, so the potential for high income will be reduced sharply.”
As with other actively managed funds, Bulgin believes the TER does not tell the whole story and that the true running cost is far greater. “Experience has shown that the majority of actively managed funds fail to beat their benchmark consistently over a long period of time and cost can be a major drag on performance. There is no performance so advisers are buying the process and the track record of the fund management team,” he says.
Scanning the market for potential competitors, Bulgin says: “There are many other European funds and a major competitor must be Invesco Perpetual’s European high income fund. This was launched in May 2008, but does include fixed interest holdings. Invesco Perpetual also has a European equity income fund, which has a lower yield.”
Bearing in mind the number of funds in the sector and the fact that as with any new fund there are no published track records on which to base recommendations, Bulgin believes it may take some time before advisers recommend this new fund. However, he adds that the high level of income certainly has attractions.
Bulgin concludes: “Allianz RCM is a highly respected investment house and the approach of buying out of favour shares where there are attractive levels of dividend and in many ways resembles the approach taken by UK recovery fund managers.
“It is Allianz’s belief that Europe is better placed to weather the current economic storm and should do better than the UK. However, other commentators believe that the euro is over-priced against sterling and adverse currency movements could also have an impact on investors. So in the event that Allianz’s theory proves to be correct then investors in the fund should reap handsome benefits.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average