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Fund Review: European Income

Introduction

Finding income in Europe has been a struggle in the past year. According to FE Analytics, in the past 12 months to February 12, the IA Europe ex UK sector has lagged the IA’s Global Equity Income and UK Equity Income sectors. Europe ex UK returned a less than thrilling 2.54 per cent in the period, compared to the 7.07 per cent generated by the IA UK Equity Income sector and a respectable 11.57 per cent returned by the IA Global Equity Income sector.

Over three years to February 12, the IA Europe ex UK sector has delivered 42.05 per cent to investors, not far behind the UK Equity Income sector, which clocked up a return of 45.89 per cent.

But nervousness around European markets in 2014 deterred investors from the region. The Investment Association revealed that Europe recorded net retail sales last year of just £156m, down from £2.1bn in 2013.

However, the decision by the European Central Bank (ECB) to get quantitative easing (QE) up and running from March could have a positive effect on European equities.

In a recent investment note, Invesco Perpetual’s chief investment officer Nick Mustoe, points out:

“The announcement of QE has been hugely supportive for financial markets, more so than for the real economy. It should provide a real boost for European equities and underlines our bullish views on the asset class.”

He adds: “I feel increasingly positive on European equities based on the market’s reluctance to believe that there’s upside to growth and earnings for European companies. As a result, European equities are still valued at a large discount on both a relative and historic basis.”

As Ross Watson, co-manager of the Martin Currie European Equity Income fund points out, one sector where the outlook for income is improving is banking.

He explains: “After a few years of not being allowed to pay dividends because their balance sheets weren’t strong enough, we’ve recently seen a dramatic change.”

For Martyn Hole, investment specialist at Capital Group, valuations in Europe are looking “reasonably attractive” as a weak euro supports earnings and adds to profitability.

But he cautions: “Economic conditions in the euro area remain challenging and Ukraine-Russia hostilities continue to pose a major risk to the region. Output and investment remain anaemic and growth is expected to be weak and uneven across countries.

“The macroeconomic view on Europe is very different from a view of the markets. This is because many companies in Europe are export-oriented, so their fortunes are tied as much to the US and China as they are to Europe.”

Mr Hole notes: “Many European businesses also offer attractive dividend yields, meaning that investors can get paid to wait for an economic recovery to materialise and company earnings to improve.”

THE PICKS

Allianz European Equity Income

Jörg de Vries-Hippen and Neil Dwane have managed this modest £28.63m fund since its inception in March 2009. It aims to increase income along with capital growth by investing in companies in Europe. The fund has delivered top-quartile returns in the IA Europe ex UK sector over one and three years, following a bottom-quartile performance over five years. In the past 12 months to February 12 it generated a return of 5.69 per cent, compared to 2.91 per cent by the sector.

JPMorgan European IT Income

This investment trust has clocked up several years of outperformance with co-managers Stephen Macklow-Smith, Alexander Fitzalan Howard and Michael Barakos at the helm. It aims to provide growing income and the potential for long-term capital growth. This £103.5m investment trust, which launched in 2006, counts Nestlé, Siemens and Unilever among its top-10 holdings. It is placed in the top quartile of the AIC IT Europe sector over one, three and five years. In the five years to February 12, the trust returned an impressive 94.84 per cent, compared to the sector average of 90.39 per cent.

EDITOR’S PICK

Invesco Perpetual European Equity Income

Run by Stephanie Butcher, this £349.52m fund uses a strategy that seeks to invest in companies with attractive valuations that have the potential to pay and grow dividends. It launched back in December 2007 and since then Ms Butcher has delivered consistent top-quartile returns. FE Analytics shows that in the five years to February 12, the fund generated a 66.21 per cent return, against the IA Europe ex UK sector, which returned an average of 52.75 per cent. It has maintained that outperformance over three years to February 12, with a return of 59.98 per cent, compared to the 41.43 per cent sector average.

Ellie Duncan is deputy features editor at Investment Adviser

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