Several managers have claimed the strategy of targeting value stocks – those which trade below their perceived intrinsic value and are deemed to be overlooked by investors – would be problematic at this point.
Last week two of Europe’s key economies, Germany and France, posted meagre growth for the third quarter.
This data came shortly after the European Commission slashed the expected growth rates in eurozone for 2015 to 1.1 per cent, compared with a prediction of 1.7 per cent just six months ago.
Ian Heslop, who runs the £1.2bn Old Mutual Global Equity Absolute Return fund, said those who are investing for value in Europe are likely to “get their heads handed to them”.
The manager uses quantitative methods to run his funds and the process has proved particularly successful at spotting market trends, with the fund delivering positive returns in every year since launch in 2009.
“Investors need to look at what style of investing works in this kind of environment,” Mr Heslop said.
“Cheap stocks are just going to get cheaper, so investors should look to bring in quality.”
Tony Lanning, who runs the JPMorgan Asset Management Fusion fund range, agreed.
“European value did really well at the end of last year, but it has become very clear to us that finding value is difficult and so we are searching for opportunities in quality stocks,” he said.
The manager acknowledged economic growth was challenged in Europe at present and said the “best solution is to change the mix to quality stocks”.
Mr Lanning said he was considering of rebalancing his exposure to Europe, citing Montanaro as a company he liked because of its focus on quality growth stocks.
Kathryn Matthews, chairman of one of the group’s investment trusts, even remarked in its annual report earlier this year that it had “been a deeply frustrating year for our investment manager, whose distinct quality growth style has been eclipsed by a market favouring value and recovery stocks”.
However, Mr Lanning said he expected investors shortly to switch away from value and move towards quality, growth-based stocks.
Ian Aylward, head of multi-manager research at Aviva Investors, has also rotated some of his European equity holdings, deciding to sell out of the £1bn Baring Europe Select Trust and into the Invesco Perpetual European Equity Income fund, run by Stephanie Butcher.
The manager said Ms Butcher took “quality as a big consideration in her approach”, but had chosen to avoid potential value traps.
“She doesn’t hold any utilities even though they seem cheap, and she is quite selective about her bank holdings,” Mr Aylward said.
However, Kevin Murphy, co-manager of the $81.5m Schroder ISF Global Recovery and the group’s £1.5bn Income fund, said he thought quality stocks were expensive because investors were chasing such names.
“There is a lot of evidence if you buy the cheapest things and hold them for three to five years they will make a good return,” he said.
Lew: ‘The world cannot afford a European lost decade’
The move to quality growth stocks is likely to lead managers towards businesses that might not be the cheapest on the stockmarket, but which have greater certainty of earnings.
This could be significant given comments last week by Jack Lew, US Secretary of the Treasury.
Speaking ahead of the G20 meeting in Australia, Mr Lew said: “In short, status quo policies in Europe have not achieved our common G20 objective of strong, sustainable and balanced growth.
“The European Central Bank has taken forceful steps to support the economy through accommodative monetary policy.
“But as recent economic performance suggests, this alone has not proven sufficient to restore healthy growth.”
Mr Lew added that “resolute action” was needed to “reduce the risk that the region could fall into a deeper slump”.
“The world cannot afford a European lost decade,” he said.