EuropeanMay 22 2015

Insight: Europe

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Insight: Europe

Europe has been a particularly difficult space to invest over the past five years. Many of its economies have slumped during a hard-hitting recession and growth has been stagnant.

In January, it was announced that the European Central Bank (ECB) would be injecting at least €1.1tn (£813bn) into the eurozone economy by purchasing €60bn (£44bn) bonds each month until the end of September in a new quantitative easing programme. Record low eurozone rates were a primary reason to attempt to boost the failing monetary group, and the ECB also announced it would be holding interest rates at 0.05 per cent – a record low.

But in April, it looked like there were signs of a recovery. It was announced that the eurozone is now out of deflation, and the inflation rate stood at 0 per cent in April, a small increase from March at -0.1 per cent. Unemployment stood at 9.8 per cent in March across the eurozone, with Germany enjoying the best figures at a rate of 4.7 per cent while Spain and Greece came off worst at 25.7 per cent (for the most recent level available in January) and 23 per cent respectively.

In March, the ECB revised up its estimated real GDP growth from 1 per cent to 1.5 per cent in 2015, and from 1.5 per cent to 1.9 per cent in 2016. This positive move comes despite the threat of a Greek exit from the euro.

Up and down

But with an up and down economy, how have investments fared? A quick look at recent figures shows that despite the gloomy headlines over the past five years, investors are now more positive on Europe than ever. In fact, European equity funds were the best-selling in March with net retail sales of £663m, according to the latest figures from the Investment Association (IA). The last time the space saw such highs was in October 2013 with net retail sales of £364m.

The top selling sector for March was Europe excluding UK, which saw net retail sales of £506m. It has not been the best selling sector since August 2000, when sales stood at £298m.

There are 15 investment trusts in the European space from the AIC sectors Country Specialists Europe, Europe, European Smaller Companies and European Emerging Markets. The average gearing is 5.4 per cent.

Table 1 shows the top performing unit trusts and investment trusts in all Europe sectors over five years according to FE statistics. It is clear that investment trusts have broadly outperformed their open-ended counterparts. The top performing investment trust is the Jupiter European Opportunities, which returned £2,666 on an initial £1,000 investment – 21.7 per cent annually.

But not all European investment trusts have been so positive. Emerging Europe particularly, has been in a tough spot. In investment of £1,000 in the JP Morgan Russian Securities trust five years ago would have seen a drop of -8.4 per cent annually, with the investment dropping to £644. Likewise, the Baring Emerging Europe fund failed to see strong returns, with an annualised drop of -5.53 per cent over the same period.

The top performing unit trust did see solid profits over five years, providing a return on investment of £2,137, 16.4 per cent annually. The €1.6bn (£1.2bn) fund, managed by Oliver Kelton at Odey Asset Management, is domiciled in Ireland and sees a strong bias to France and the UK. The fund holds 15 per cent cash, adding an element of near-safety for the otherwise precarious continent.

The European Smaller Companies sector has five unit trusts within the top 10, despite the sector seeing just £44m of net inflows in March this year. The Lazard European Smaller Companies fund is the top performing small-cap focused fund within the unit trust space. It saw a return of £2,012 on its initial investment, an annualised figure of 15 per cent.

The fund has been managed by Edward Rosenfeld since 2013, and has its largest allocation to UK small-cap equities. However its largest holding is in Aalberts Industries, a Dutch building installations and climate control company.

FIVE QUESTIONS TO ASK

1. Which countries does the fund allocate to? The country allocation could have a bearing on volatility. For example, if the fund invests predominantly in emerging Europe, it may not see as strong returns as the UK, and it could have liquidity issues.

2. What is the average market capitalisation? Market caps across the continent do not translate for each country. What is classified as a large-cap UK company may not be of a similar size to a large-cap company in Poland.

3. How much risk is there? Investing in any equity fund comes with risk, but European funds may not carry as much risk as they did three years ago. Look into the strategy and also by reading the key investor information document (KIID), it will be clear what the manager thinks the risk/reward profile will be for the term.

4. What currency is the it denominated in? While this shouldn’t have much impact on cost, it could be more expensive investing in a euro-denominated fund. Many funds will be available in different currencies. Look into the share classes.

5. Does it invest in the UK? It could be that a fund within the Europe ex-UK sector could still have a significant allocation to the UK. The IA stipulates funds within the sector must invest at least 80 per cent within European equities excluding the UK, but this does not mean some or all of the remaining 20 per cent could not be used in the country instead.