Europe had a cracking year in 2017, as it continued to make up ground lost during the financial crisis. The continent’s subsequent recovery has been slower than elsewhere, but accelerated over the past 12 months.
Potential political threats, including elections in key EU countries and a constitutional crisis in Catalonia, were shrugged aside and the MSCI Europe ex-UK index was on course for its best result since 2013, posting a 12.79% gain to November 30.
There are still elections on the horizon. Germans could well go back to the ballot box; Italians definitely will. The European Central Bank’s move from away from quantitative easing (QE) also presents risks.
With many commentators in the latter part of the year advocating allocating to the region, contrarians will now be asking when to make their exit. Investment manager Psigma expects Europe’s cyclical resurgence to begin to stumble this year.
Guy Foster, head of research at Brewin Dolphin, says “being able to escape from the very crowded areas of Europe and emerging markets before a growth wobble” will be one of his biggest relative opportunities in 2018.
But most are still positive. While not cheap, European equities do look good value relative to US stocks. Business and consumer confidence remains high and corporate earnings are strong.
For those still banking on the recovery continuing, we’ve picked out some top Morningstar-rated funds and investment trusts for the year ahead.
Jupiter European and Jupiter European Opportunities (JEO)
Both these offerings are managed by Alexander Darwall and hold five-star performance and Gold analyst ratings.
The pair are high-conviction funds, with just 35 and 34 stock positions respectively. In the closed-end version, Darwall’s top 10 holdings account for three-quarters of his portfolio. The three largest are German software provider Wirecard (WDI), Danish drugmaker Novo Nordisk (NOVO B) and Dutch information and analytics publisher Relx (REN).
Darwall’s funds are based on a single strategy, according to Morningstar analyst David Holder. That said, the investment trust currently has almost a fifth of its assets invested in the UK as opposed to less than 2% for the open-ended offering. Therefore, which of the two vehicles you prefer depends on your views on the UK.
From the same stable, Jupiter European Special Situations is rated Silver by Morningstar analysts.
BlackRock European Dynamic
With five-star performance and Morningstar Silver Ratings, this fund has thrashed its benchmark in each of the previous three years. However, Morningstar’s Muna Abu-Habsa notes that it has the potential for higher levels of volatility. As a result, it’s suitable for more adventurous investors able to handle extra risks.
Manager Alister Hibbert’s style is “characterised by high turnover, large bets and a concentrated portfolio”. He takes large sector and stock bets, currently 12% overweight industrials and 12% underweight financials. Swiss pair Richemont (CFR), a luxury goods brand, and Lonza (LONN), a chemicals firm, are the biggest holdings.
Adrian Lowcock, investment director at Architas, also tips the fund as one of his best ideas for 2018. He says it has produced consistent market returns over time.
Henderson EuroTrust (HNE)
This investment trust is headed by one of the most experienced investors in the sector, according to Morningstar analyst Peter Brunt, who awards it a Silver Rating.
Brunt says Tim Stevenson, manager since 1992, has proved an astute stock picker and has shown skill in constructing a well-balanced portfolio, enabling him to produce strong returns through various market conditions. £1,000 invested at inception would have been worth more than £26,000 as at July 31.
Stevenson looks for quality companies trading at reasonable valuations with long-term growth potential. Although primarily a bottom-up strategy, he also incorporates analysis of an industry’s growth potential into his investment decisions.
“We continue to have a high level of conviction in this fund's ability to outperform over the long term,” concludes Brunt.
Schroder European
This fund, managed by Martin Skanberg, is more focused on large-cap companies, typically targeting those with either sustainable, profitable growth above market expectations, or improving long-term returns.
Brunt likes Skanberg’s “measured approach to investing” and believes him to be a safe pair of hands for investors seeking core continental European equity exposure.
“He is style-agnostic, assessing each investment opportunity in terms of an inflection-point thesis, implied market valuation and share price behaviour. That said, he is willing to tilt the portfolio at times to reflect the areas where he sees the most opportunities.”
Lowcock prefers its income-oriented stablemate, Schroder European Alpha Income, managed by James Sym. His cyclical stock-picking strategy should benefit investors most in a rising market, Lowcock explains.
