Best in Class: BlackRock Continental European Income
Unloved for so long there has always been something of a “maybe next year” tag around investing in Europe.
There is no doubt it is a market that has been maligned, but you cannot ignore the multitude of successful companies with a global remit across the region.
As we approach 2021 there is, once again, a strong argument that Europe could offer catch-up potential to investors should we see a continued recovery in equities.
The reason for this is that companies in Europe are more cyclical in nature – this means that unlike their peers they have not felt the full force of the earnings-cushion from growth-led industries like technology since the sell-off.
There is also an income angle I recently picked up in a note from Credit Suisse*. It points to the various regulatory measures regarding dividend payments designed to offer capital buffers to the likes of insurance and financial companies following the market crash.
Credit Suisse believes many of these measures will be phased out as the economy settles down - a move that “would increase the attractiveness of high dividend strategies, which tend to be more relevant in European equity markets.”
This week’s Best in Class is well placed to tap into the opportunity.
The BlackRock Continental European Income fund is managed by Andreas Zoellinger, who started working with the firm in 2001. He is ably supported by a European equity team consisting of 18 portfolio managers/sector analysts, ensuring comprehensive market coverage.
The fund employs an active bottom-up approach to income investing. The team does not simply search for the highest yielding stocks, but rather seeks to identify undervalued stocks in the high yield and/or quality space that offer sustainable dividends, potential dividend growth and inflation protection.
Research is central to the investment process and a key source of alpha for the fund. The team has a structured framework in place for each stock, containing price targets and ratings.
Team members sit in a ‘pod’ structure to facilitate debate and discussion and ensure senior managers provide ‘peer reviews’ of research before it is presented to the team.
Analysts are expected to look for new ideas as well as cover existing holdings, but do not spend time on maintenance research. Portfolio managers have exceptional access to senior management within the companies they invest, conducting hundreds of meetings every year.
The output of the investment research process is a clear recommendation and a price target 12 months from today. The team uses a rating system from 1–5 when recommending stocks: 1 is a strong buy and 5 is a strong negative.
This fund invests predominantly in continental European large and mid-caps, meaning 300-350 stocks are researched in detail. Sector selection has been consistent, with financials and industrials making up a large portion of the fund.