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Europe re-emerges

Paul Farrow says the Continent has been shunned despite producing strong returns.

Whatever happened to the idea of investing in Europe? Go back a decade or so and the subject of the euro and the EU were never far from the headlines.

In the City, asset managers drooled at the thoughts of conquering Europe – whether with their own organisation setting up on the Continent or via funds investing in the region. There were even a couple of pan-European funds on offer to whet the appetite.

And financial advisers lapped it all up. It was a time when one fund in particular, Rory Powe’s Invesco Perpetual European fund, really caught the imagination.

The fund size swelled from £250m in 1998 to £3.3bn at its peak in 2000 as investors rushed to buy the fund. The fund’s success was driven by Powe’s ability to select medium and smaller-sized firms, which powered ahead and delivered superior returns.

Many of these were tech-related stocks. But Powe’s judgement was not as shrewd as he thought and the fund’s value plunged when the dotcom bubble burst.

At its height, more than 220,000 investors had bought the Powe story.

But our love for Europe seems to have all but petered out. Today, all talk among fund managers is of gold, absolute return, commodities and emerging markets. I cannot recall the last time that a fund manager wanted to talk to me about their European offering.

Of course, there was another reason why demand for Europe dwindled in the new millennium. The new Isa rules allowed funds from across the globe, whereas previously Pep investors were generally restricted to the UK and Europe.

All of a sudden, investors could invest tax-efficiently in emerging markets and other specialist funds. And, as we all believe the grass is always greener elsewhere, so European funds have been overlooked for much of the decade.

But have investors made a mistake shunning European funds?

The charts from the Investment Management Association reveal that, for much of the decade, Europe has outperformed other regions.

Since 2003, the IMA Europe excluding UK sector is up by 80 per cent compared with the UK all companies sector return of 60 per cent and North America, which is up by just 22 per cent.

Over five years, the sector has outperformed the UK and the US by 7 per cent and 19 per cent respectively and has returned 30 per cent itself.
Gradually, fund managers are starting to put their heads above the parapet to talk up the European story despite ongoing concerns in the eurozone.

The latest company to do is Fidelity. The company suggests a number of reasons why Europe is attractive – from higher dividend yields, to a competitive return on equity, to strong earnings’ growth. It says: “It is also important to be aware that European companies have a relatively high exposure to the high-growth areas of the world and accounted for between 16 per cent 48 per cent of the Bric nations’ total imports last year.”

But it is not alone. According to Bank of America-Merrill Lynch’s September fund managers’ survey, two-thirds of investors view European companies as cheap, the highest reading since February 2003. This offers scope for a rally should economic news improve, say the managers.

Going contrarian does not always pay dividends – you only have to look eastwards to Japan to see that, but Europe has not gone away.

nstead, it has delivered some decent relative returns and if the eurozone crisis does not implode on the whole continent, skilful fund managers might prosper.
<B>Paul Farrow is personal finance editor at the Telegraph Media Group


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