Get cheap European exposure with F&C

Peaking unemployment is expected to rise further over the next couple of years, while eurozone banks remain at risk of further capital calls. And against this rough backdrop there is potential for further bouts of risk aversion and resultant weakness in European equity markets.

But Mick Gilligan, head of research at Killik & Co, says all this is "well flagged" and should already be factored into investors' positioning and decision-making - and, crucially, into the pricing of equities.

If you want a fund that will give you exposure to this value-for-money market, consider F&C's European Assets Trust (EAT) . It's an investment trust that aims to achieve growth of capital through investment in a diversified portfolio of quoted small and medium-sized growth businesses in Europe, excluding the UK.

The trust's performance is impressive - its net asset value return was 46 per cent over the past year, compared with 38 per cent from the FTSE World Europe Ex UK Total Return GBP Index.

It also pays a chunky 5.52 per cent yield, which makes it very attractive for income hunters. The trust has a high distribution policy, which is paid in equal instalments in January, May and August, and it is able to make dividend distributions using accumulated capital gains as well as from income.

The eight-strong management team had a minor shake-up in 2010 with the departure of Paris Anand and the arrival of Sam Kosh, the new lead manager. But Mr Kosh has a good track record and, reassuringly, is heavily invested in the fund himself.

His success has been driven by picking high-quality businesses with high and sustainable returns on capital that are backed by strong balance sheets. He also looks for companies run by management with strong track records in capital allocation and which trade in industries with high barriers to entry.

He bought plastic car parts maker Plastic Omnium and has made a 75 per cent year-to-date return on it - one of his major recent triumphs. He's also done well with Continental Farmers Group and Aer Lingus, as well as a handful of financial companies.

"All financial companies in Europe have been tarred with the same brush, but not all of them are bad. This means that we have been able to find some very good value stocks," he said.

He says the biggest threat to the fund is European politicians, who he says have been making some bad decisions recently. For example, he was not impressed with the handling of the banking crisis in Cyprus or with some of the decisions made on austerity measures in Germany. He also says a risk rally would send the fund tumbling behind the market, but he doesn't see this as a likely scenario so isn't losing any sleep over it.

The trust's ongoing charge of 1.71 per cent is slightly above average. However, its outperformance has more than compensated investors for the cost of investing.

Despite the strong recent performance and the 6 per cent historical yield, the fund still trades on a discount of more than 3.3 per cent to NAV. Buy.

European Assets Trust (EAT)

Annual returns (%)

Notes: *FTSE World Europe Ex UK Total Return GBP Index. **to 31 May 2013.

Top 10 holdings and country allocations (as at 30 April 2013)