While many managers have been wary of adding high weightings to the most troubled European economies, such as Ireland, Italy, Greece and Spain, those who have had exposure to stocks listed in these countries have been rewarded.
JPMorgan Asset Management’s John Baker has a 4.3 per cent weighting in Ireland in his £157.7m European Dynamic (ex UK) fund – 3.8 percentage points above the benchmark weight in the FTSE All World Developed Europe ex UK index – and said the companies he invested in had helped boost performance.
The fund is top quartile in five-, three- and one-year periods in its IMA Europe excluding UK sector, according to FE Analytics, and posted a top decile return in 2013.
“The key thing that is driving earnings growth in Ireland is a very strong economic recovery,” Mr Baker said.
“The relative unit labour costs have come down 25 per cent since 2007, which has attracted $129bn (£79.2bn) of foreign direct investment, which is more than emerging Asia.”
The manager said he started adding exposure to Ireland in February last year and decided to target companies that would benefit from the improving domestic economy, falling unemployment and rising house prices.
He invested in Bank of Ireland, which he said had since seen earnings upgrades driven by a cost-cutting programme and had benefited from a reduced cost of capital. As government bond yields have fallen in Ireland, access to capital becomes cheaper for banks.
Mr Baker said packaging business Smurfit Kappa, an Ireland-listed business but with a global profile, had also prospered in the consolidated packaging industry.
The manager’s stance has paid off in performance terms, but also in investor support. The fund has risen in size from £88m as at September 30 to £157m now – a growth of 88 per cent, according to FE Analytics.
Meanwhile, Argonaut’s Barry Norris (pictured) has also seen his investments in Greek and other European banks pay off.
The manager’s £216m FP Argonaut European Alpha fund is solidly top quartile in five-, three- and one-year timeframes, according to FE Analytics.
The manager has been vocal about an economic recovery across Europe and sought to take advantage by investing in several banks last year.
He said that growth expectations were now “more solidly based” and surveys of economic activity suggested peripheral countries “will emerge from recession this year”.
Greece last week registered a 65-week high in its Purchasing Managers’ index, hitting 51.2. A reading above 50 indicates economic expansion.
Mr Norris said he and his team had been investing in Greek banks “for many months” adding that Europe’s banking sector was set to drive earnings growth on the Continent this year.
“The best time to invest in a country is often when its economy is emerging from recession and all of the bad news is in the rear-view mirror,” he said.
“We have previously highlighted the European banking sector as the most obvious stockmarket beneficiary from a European economic recovery. It should therefore come as no surprise that the Greek banks are the most geared equity investments to the ‘Grecovery’. “In our opinion, they offer, some compelling investment opportunities.”
Henderson Global Investors’ European manager John Bennett also recently invested in a Greek bank and is overweight European banks for the first time in roughly seven years.
Nick Williams’ £1bn Baring Europe Select Trust fund has benefited from punchy weightings in Italy – now at 9.7 per cent – and Ireland, currently at 4.4 per cent, according to the fund’s latest factsheet.
Investment Adviser revealed in December that three European equity managers – Jupiter’s Alexander Darwall, Threadneedle’s David Dudding and Schroders’ Leon Howard-Spink – had fallen to the bottom of their IMA Europe ex UK sector in the 12-month period, due to their focus on ‘quality growth’.
