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Fund Review: European Income


But now European markets have stabilised and tension surrounding a possible Greek exit from the eurozone has abated, could there be some opportunities for dividend investors in the region?

Stephanie Butcher, manager of the Invesco Perpetual European Equity Income fund, believes there are but concedes it has been a difficult couple of years for Europe.

“Ultimately there is a lot of stimulus in the European economy and I think the risks to Europe come more from outside than they have done in a long time,” she notes. “Over the past five years Europe was always top of the list of problem areas and you could understand why with the sovereign [debt] crisis. Now, when we do our monthly meetings, it’s less [about] what’s going wrong [in Europe].”

There are a number of open-ended funds offering exposure to this asset class. A search for funds in FE Analytics with ‘European income’ in the title reveals 16 such vehicles. Four of these have at least 10-year track records, with the Capital Group European Growth and Income fund coming out on top over 10 years to November 20, returning 106.2 per cent. But the FP Argonaut European Enhanced Income fund has generated the best return in the 12 months to November 20, delivering 20.4 per cent, with the next best-performing fund, BlackRock Continental European Income, returning 9.5 per cent.

There are currently several factors supporting growth in Europe and those look likely to remain tailwinds for the region in 2016.

Matteo Germano, global head of multi-asset investments at Pioneer Investments, says: “Easy financial conditions, low oil prices and the gradual normalisation of fiscal policies, especially in Europe, are all supportive factors for the 2016 economic outlook. In the eurozone, the outlook is improving. Here, the abundant liquidity is, at least to some degree, being felt throughout the real economy.”

He adds: “In this moderate positive global growth framework, we believe the corporate sector has still potential to generate earnings, especially in Europe and Japan.”

For Ms Butcher, earnings growth is set to be the main driver for European equities next year.

“If you go back to 2007, that was the last peak and earnings are roughly 30 per cent below that peak, in contrast to the US where earnings are already well above that previous peak,” she points out.

“So there’s a big lost chunk of earnings, and to be bullish on Europe I think you need to believe some of that will come back and that is our view.”

Ms Butcher suggests dividend growth should come with those earnings, too.

“We’re not anticipating a massive hike in payout ratios from here – I think we’re around average payout ratios as we stand today – so it needs to be earnings coming through to really push the dividend growth, but there’s plenty of opportunity for that to happen and that’s why we’re still pretty constructive on the European space,” she adds.


FP Argonaut European Income

This fund, which launched in December 2005, is managed by Oliver Russ, with Greg Bennett assisting, and aims to provide an income in excess of the yield of the MSCI Europe ex UK index. A regional breakdown shows its portfolio has 21 per cent allocated to Germany, 18.2 per cent in France and 13.5 per cent to Sweden. Its top five holdings include Swedbank, Daimler and Ryanair. The fund has delivered steady returns over one, three and five years, FE Analytics data shows. In the three years to November 18, it returned 43.7 per cent, slightly ahead of the average 41.6 per cent return of the IA Europe ex UK sector.

Jupiter European Income

Gregory Herbert and Cédric de Fonclare manage this fund that targets “high and rising” income. Some of its largest positions are pharmaceuticals and healthcare firms, with Roche, Bayer and Novartis its top three holdings. This fund has been running since May 2007 and is still on the small side at £54m. The managers have generated steady returns, although over three years to November 18, it returned 35.8 per cent, whereas the IA Europe ex UK sector average was 41.6 per cent.


Standard Life Investments European Equity Income

Run by Will James, this £2.3bn fund has been popular with investors. The manager runs a fairly concentrated portfolio of around 57 stocks and has the ability to hold some in government, corporate and other bonds to supplement the income. France is the largest weighting in the portfolio at 18.2 per cent, followed by Switzerland at 13.6 per cent. The top three holdings are tech firm Nokia, and pharmaceuticals companies Roche and Novo Nordisk. The fund has delivered an impressive return of 47.7 per cent in the five years to November 18, against the IA Europe ex UK sector average of 38.5 per cent.

In this special report