Capture improving European backdrop with BlackRock European Dynamic

Wealth manager Whitechurch Securities believes there are more attractive valuation-driven opportunities in this region due to greater prospects for earnings recovery, particularly in cyclical domestically focused sectors. We recently flagged Henderson European Focus Trust (HEFT) as a good way to take advantage of these.

However, with economic and market improvement in Europe it could also make sense to counterbalance that with a Europe growth play, and a good option for this could be BlackRock European Dynamic Fund (GB00BCZRNN30).

This fund's investment team look for undervalued companies or those with good growth potential, selecting them according to their individual merits but with a strong awareness of macro themes. The fund has outperformed its benchmark, FTSE World Europe Ex UK Index, by a healthy margin over one, three, five and 10 years, over which periods it is also well within the first quartile of the Investment Association (IA) Europe Excluding UK fund sector in terms of performance.

The fund has benefited recently from being underweight in financials, a sector where manager Alister Hibbert thinks regulatory pressure to deleverage is inevitable and, along with continued quantitative easing, will lead to weaker profitability. He focuses on businesses with high earnings visibility and attractive stock-specific attributes, largely avoiding highly cyclical areas in the materials, oil and gas, and financial sectors.

The fund invests both in companies with medium- to long-term earnings power that's greater than the market, and those in a restructuring or turnaround situation.

The fund had been underweight emerging markets in terms of underlying earnings, but this is selectively increasing, as Mr Hibbert thinks countries such as Brazil and Russia have undergone a good deal of rebalancing over recent years. But he is still cautious on China.

BlackRock, meanwhile, plans to close this fund to new investment when its value reaches £2.5bn, so with assets approaching £2.1bn so the opportunity to access its strong performance might not be around for long.

BlackRock European Dynamic's portfolio trades on a premium to the broader index, on a prospective price/earnings ratio (PE) of 17 times against 13 times, according to Mick Gilligan, head of research at wealth manager Killik. This is partly due to the fund's sector positioning.

There is also no guarantee that Europe will continue to do well. But Mr Gilligan also argues that the higher PE ratios are justified by superior underlying growth rates compared to the broader index, with prospective earnings per share (EPS) growth of 11 per cent versus 5 per cent, higher profitability measures and lower leverage.

Mr Hibbert also asserts in his latest commentary that: "We retain a keen eye on valuation and continue to focus on stock selection against a volatile market. We are sticking to companies that offer higher earnings visibility and attractive stock-specific drivers, and we are looking to avoid value traps in highly cyclical businesses in a time of uncertainty."

So if you want exposure to what seems like one of the more attractive developed markets, via a fund and manager with a proven ability to deliver growth regardless of market and economic conditions, BlackRock European Dynamic Fund still looks like a good option. Buy.

Source: Morningstar, *BlackRock

Performance*

Morningstar as at 9 May 2016

*This shows the returns of an older share class to illustrate the fund's performance over longer periods

Top 10 holdings as at 31 March 2016 (%)

Geographic breakdown (%)