Diversify UK income risk with BlackRock Continental European Income

If you have the appropriate risk appetite and a long time horizon, equity income is a good option for outpacing inflation - but with the problems facing the UK you should look overseas.

Continental Europe is a good place to start: in 2015, for example, while the UK's dividend pool was €50bn, continental Europe's was €192bn, according to asset manager BlackRock.

European shares typically have cheaper valuations than those in other developed markets such as the US, as well as earnings recovery potential. "However, with the risks on the continent post-Brexit the key is to find good stockpickers investing in quality businesses," say analysts at wealth adviser Whitechurch Securities.

BlackRock Continental European Income Fund (GB00B3Y7MQ71) aims for an above-average income compared with the yield of continental European equity markets, without sacrificing long-term capital growth.

A substantial proportion of its holdings are listed in northern Europe with balanced sector exposure, as its managers aim to keep its income sources secure by avoiding overexposure to one area. "This caution limits the impact of sector-specific events such as the oil price declines we have seen across the last year that triggered some operators to cut their dividends," explains Ben Johnson, analyst at broker Charles Stanley.

The fund's managers, Alice Gaskell and Andreas Zoellinger, look for undervalued high-yield or quality stocks that offer reliable, sustainable dividends, potential dividend growth and protection against inflation, with lower than average risk. "The fund's managers follow a rigorous risk control process to reduce volatility while maximising rewards, resulting in a fund that is less volatile than the index," explain analysts at research company FundCalibre.

"We are encouraged by what they have achieved over their five-year tenure, delivering growth in both capital and in the level of income the fund pays," adds Mr Johnson. "Their strategy of combining stocks that pay a high and secure yield with those that have scope for future dividend growth appears to be producing the desired results."

The fund's total returns beat its benchmark, FTSE All World Developed Europe Ex UK Index, over one, three and five years. It is also among the top 10 performing funds in the Investment Association (IA) Europe ex UK sector over those periods, out of more than 80 funds. It yields 4 per cent.

There are still economic problems in Europe and the potential for policy mistakes, which mean stock markets and share prices could fall due to investor sentiment - even if the companies the fund invests in are trading well and are profitable.

And the substantial drop in Sterling's strength also means foreign shares are now effectively more expensive than they were a few weeks ago.

But Sterling weakness also means that the value of non-Sterling earnings has increased.

Many of the companies listed on the stock exchanges in continental Europe are some of the world's largest and strongest, and make their revenues from around the world, so don't just rely on Europe. And this fund's managers have proved their ability to pick the best of these.

So if you have an investment horizon of at least five years and are looking to secure your income stream by diversifying away from UK risk, then BlackRock Continental European Income Fund still looks like a reliable option. Buy.

Source: Morningstar, *BlackRock

Performance

Source: Morningstar as at 18 July 2016

Top 10 holdings as at 30 June 2016

Geographic breakdown