No growth, too much debt, deflation, Russian sanctions, an anti-austerity government in Greece… the list of reasons to not invest in Europe might seem compelling enough to avoid the area.
However, in a poll of investment managers conducted by the Association of Investment Companies in December, Europe was the most favoured region for investment in 2015.
The attraction is the effort the European Central Bank is making to get things going again. European interest rates will most likely stay at record low levels throughout 2015. This should keep the currency weak, which will help exporters.
The low oil price is providing a boost for growth. Meanwhile, signs of life in the economies of some of Europe’s largest trading partners, such as the US and UK, should also help get things moving. Stocks in the MSCI Europe index are not especially cheap – on about 16 times forward earnings compared to closer to 17 times for the MSCI World index – but are not particularly expensive either. Furthermore, if profit growth comes through as forecast, stocks could re-rate.
Looking at the European sector information on QuotedData, the best performing European investment companies in the past 12 months in net asset value terms have been Jupiter European Opportunities, Fidelity European Values, Henderson European Focus Trust and the JPMorgan European Income portfolio. There’s no real pattern that explains why these funds have outperformed, as all of them have quite different investment styles, except that experienced stock pickers manage each. This might be the key to their outperformance.
Alexander Darwall, manager of the Jupiter fund, reiterates this point in recent comments he made about his fund. He says it is important to look for companies that can compete and succeed, regardless of the economic environment.
Logically, there must always be at least a handful of these in any market, especially if you are fishing from a sizeable pond – there are around 440 constituents of the MSCI Europe index, for example. This is the best case for buying an actively managed fund over an exchange-traded one or an index hugger.
Europe is one of the investment areas where almost every investment company has beaten its benchmark over the long term and where the average investment company outperforms the average open-ended fund by a considerable amount: 2.3 per cent per year over five years for the average large-cap fund.
The ability of investment companies to take genuinely long-term decisions pays off for investors and this seems to be particularly true for this sector. Additionally, the closed-end fund structure makes it easier to borrow money to enhance returns. This will have helped some of these funds.
James Carthew is research director at QuotedData
