BLOG: Could Europe challenge the status quo?
Year-to-date the MSCI Europe excluding UK index is down 3.1% and this performance has not gone unnoticed by investors, who withdrew £303m from European equity funds in August alone.
This marked the fourth consecutive month of outflows, as sentiment towards Europe has been impacted by weak economic data, trade tensions with the US and Italian instability, where the coalition government’s budget proposals currently face strong opposition from the European Union.
While the headlines aren’t particularly positive right now, I believe there are still opportunities for investors to make money in Europe. The region is home to a significant number of well-run companies that continue to make profits whatever the weather. What’s more, as investors have turned cold on European equities, the selling has been indiscriminate.
This means there are attractive investment opportunities for savvy investors who are able to take advantage of attractive valuations. The key is to back an active manager with a strong track record of identifying companies which have the potential to dominate their sectors. Most importantly, they must be able to buy in at an attractive price.
FundCalibre Elite Rated Marlborough European Multi-Cap is a prime example. Under manager David Walton, the fund has generated stellar returns over three and five years of 74.2% and 107.7% respectively. Over both time periods, the fund has returned more than double the Investment Association’s Europe excluding UK sector average. The fund typically backs much smaller companies in comparison to peers, which are often overlooked.
Elite Rated Jupiter European is another fund to consider. Manager Alexander Darwall adopts a high conviction, value-aware approach, and has shown an aptitude for recognising patterns of success in company business plans. This is demonstrated by his strong track record over three and five years – with returns of 56.3% and 100.2% respectively.
If you are looking for a fund that deliberately ignores European politics, Elite Rated Mirabaud Equities Europe Ex-UK Small & Mid is worth a look too. Manager Ken Nicholson aims to find the ‘hidden champions’ that other funds have missed. It not only ignores politics but most macroeconomic factors too.
He prefers to focus on individual companies and his mantra is “you can’t find the hidden champions by sitting at your desk looking at Bloomberg screens”, so the team has an intensive and targeted road-trip program to meet as many companies as possible. This is the key to the team’s success, along with focus and discipline.
The valuation gap between the US and European markets is looking particularly wide at the moment. This means US shares are looking expensive (albeit slightly less so following the sell-off this week), while their European counterparts are relatively cheap. This indicates it could be a good time to allocate some money to European equities.
While Europe has lagged the US in recent years, the status quo could change. Following the bursting of the tech bubble, European equities performed significantly better than their US counterparts between 2000 and 2007. It’s worth remembering that this followed a period of strong performance for the US market.
Of course, there are a number of risks facing Europe right now, not least the UK’s impending departure. With these headwinds in mind, there are likely to be some bumps in the road, so I would suggest investing with a time horizon of at least three to five years.
For those who are looking to pick up exposure to exciting investment stories at a reasonable price, Europe should be on the radar.
Darius McDermott is managing director of FundCalibre