Insight: Europe excluding UK

Many European funds have maintained positions in the economically troubled countries, but have subsequently benefited in the long run after a performance tailwind during 2013 and the start of 2014. However, some markets may not just see economic difficulties this year, but political issues. Investors looking at Europe should take note of how much a fund is invested in countries with a strong backing behind far right parties, and others with strong ties to Russia. It has been a country that has been a controversial investment in recent months owing to its political issues with Ukraine.

Table 1 shows the top 10 performing European excluding UK funds over the past five years to 1 June. The Table shows cumulative performances based on an initial £1,000 investment over one, three, five and 10 years as at 1 June 2014, with net income invested. It also shows discrete performance as a percentage for the past five years.

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The top performing fund is the £119m Invesco Perpetual European Opportunities fund, managed by Adrian Bignell. The fund’s highest allocation is to Switzerland and Germany – totalling nearly 30 per cent of the fund.

The sector is made up of 100 funds all of varying sizes, as can be seen in the Table. So it is clear by looking purely at fund sizes that European funds have not lost their popularity. For example, the sixth best-performing fund, the Jupiter European fund, managed by Alexander Darwall, has a market cap of £2.4bn.

The European excluding UK sector takes out any risks that come within investing in the UK. The UK is a unique space in that it is tied to Europe politically but it has its own currency. Although the UK is an open market with improving sentiment, it is a commodity rich index, and many investors may not want to be invested in such a market.

While there is still uncertainty in the space, the consensus is that European fund managers are still finding plenty of investment opportunities. But whether or not the eurozone will come out of the past five years unscathed is unknown. But having exposure to Europe adds an element of diversification, with some added risk with allocation to countries such as Greece and Portugal.

Five questions to ask:

1. What is the fund’s strategy? As with any fund, it is important to see how the manager intends to allocate the money. Whether or not the fund is a growth or value strategy may change the outcome in various market cycles.

2. How much does it invest in the UK? Europe ex-UK funds are able to still invest up to 20 per cent in the UK, but check how much the fund sticks to that IMA stipulation. It may bring different risks if the fund has a high allocation to the UK.