Insight: Europe's recovery confounds doubters

Insight: Europe's recovery confounds doubters

Investing may be a long-term pursuit, but the fortunes of European equities this year underline how a lot can change in a few short months.

Many observers predicted 2017 would be a year of pain for the continent’s stockmarkets, but it has not turned out that way. The political risks that tripped off the tongue in January – Dutch, French and German elections – have been and gone with little to worry investors. 

At the same time, the eurozone’s sclerotic economy has begun to stage a long-awaited recovery. 

July 2017 marked five years since European Central Bank (ECB) president Mario Draghi’s infamous pledge to do “whatever it takes” to save the euro. A month later brought news that eurozone GDP growth had risen to 0.6 per cent in the second quarter – ahead of both the US and the UK. The currency bloc’s unemployment rate is also falling faster than economists had expected.

Solid returns

True to form, markets had already begun factoring in this improvement. As of May, the EuroStoxx 50 index was up almost 10.5 per cent year to date as investors returned in their droves after several years of caution. The benchmark remained 9.5 per cent higher as of the end of September. 

Table 1shows those funds that have performed best over the past five years. Topping the pile is Man GLG Continental European Growth, run by former Invesco manager Rory Powe. A caveat is that Mr Powe has only run the strategy for the past three years: the vehicle is second only to Marlborough European Multi-Cap over this time period.

Both portfolios have a preference for spreading investments across small and mid, as well as large-cap stocks. The style is particularly evident in the case of the Marlborough fund, which has half of its portfolio in companies with a market capitalisation of less than £1bn.

One difference between the two vehicles is the weightings given to individual stocks. Both list Ryanair among their largest positions, for example, but the airline accounts for 1.5 per cent of the Marlborough fund compared with 7 per cent of the Man GLG portfolio. The company’s recent capacity struggles have hurt its share price and have contributed to the latter fund’s less distinguished one-year returns.

The other top-three offering is the Henderson European Focus trust, run by John Bennett. The manager lagged peers in 2015-16, but has outstripped all comers over the past 12 months with a one-year return on £1,000 of £1,360. Mr Bennett has put his faith in the financials that are benefitting from the region’s recovery – the sector accounts for more than 25 per cent of his trust – alongside his longstanding preference for pharmaceuticals.

As would be expected during a period of solid returns, the typical investment trust has beaten the average open-ended fund. But trusts’ ability to gear up portfolios does not always mean they do so: in 2015-16, for example, the sector trailed open-ended peers by more than 7 percentage points.