Continental Europe's economic prospects finally seem to be improving with unemployment falling to its lowest level in eight years and growth picking up across the region.
- Good performance
- Attractive yield
- Experienced managers
- Exposure to European recovery
- Lower than average risk
- Short-term performance
- Political uncertainty
"The cyclical recovery across Europe is showing signs of gaining momentum," says Michelle McGrade, chief investment officer of TD Direct Investing. "This is being aided by easier borrowing conditions for both corporates and households, helped by a European banking system which is finally becoming better capitalised and willing to lend. The threat of deflation is also abating, with inflation approaching the European Central Bank's target of 2 per cent."
Analysts at investment bank Morgan Stanley (MS:NYQ), meanwhile, have recently raised their 2017 estimate for earnings per share (EPS) growth for European equities from 12 to 16 per cent, citing better than expected economic growth and stronger EPS momentum from financials.
European equities are also typically on cheaper valuations than those in other developed markets such as the US.
A good way to get exposure to them could be BlackRock Continental European Income Fund (GB00B3Y7MQ71), which aims for an above-average income compared with the yield of continental European equity markets, without sacrificing long-term capital growth.
The fund has beaten its benchmark, FTSE All World Developed Europe Ex UK index, over three and five years, and it is in the first quartile of the Investment Association (IA) Europe Excluding UK sector over those periods in terms of performance. It also has an attractive yield of just under 4 per cent, so it is a good way to diversify your sources of income.
BlackRock Continental European Income has experienced managers who have run it since launch. Alice Gaskell and Andreas Zoellinger have a good record of generating alpha from stock picking. According to FE Trustnet data, Ms Gaskell delivered a cumulative total return of 107.2 per cent over 10 years, compared with 68.8 per cent for a composite of her peer group. And Mr Zoellinger delivered a cumulative total return of 89.7 per cent over seven years, compared with 65.9 per cent for his peer group.
The managers look for undervalued stocks that offer reliable and sustainable dividends, potential dividend growth, and protection against inflation, with lower than average risk. The fund has a concentrated portfolio of 44 stocks with industrials accounting for a third of assets and financials just over a quarter. Although the fund is overweight financials compared with its benchmark, it is underweight banks as the managers are cautious about their dividend reliability. They only own Banca Fineco (FBK:MIL) which they bought in February, and Danske Bank (DANSKE:CPH).
A substantial proportion of the fund's holdings are listed in northern Europe with the Netherlands, France and Germany accounting for over half of assets.
Amid rising populism, France and Germany both have elections this year. This may cause some market volatility, particularly if far-right National Front candidate Marine Le Pen wins the French presidential election.
And the fund has underperformed its benchmark and sector average over one year.
However, James Yardley, senior research analyst at Chelsea Financial Services, says: "This fund has a slight quality bias which meant it was hit by the big rotation to value we saw last year. But [longer-term] performance has been excellent. For an investor wanting a longer-term European income fund this is a great holding. It has a really solid team and is well resourced."
And as the political shocks of last year show stock markets don't necessarily have a long drawn out adverse reaction to them, meaning that focusing on the fundamental investment case for companies and funds can be a better way to choose where to invest.
So BlackRock Continental European Income still looks like a good way to get an attractive yield, good long-term performance and exposure to European recovery. Buy. EA.
BlackRock Continental European Income Fund (GB00B3Y7MQ71) | |||
---|---|---|---|
Price: | 151.5p | 3-yr mean return: | 11.13% |
IA Sector: | Europe Excluding UK | 3-yr Sharpe ratio: | 0.96 |
Fund Type: | Unit trust | 3-yr standard deviation: | 10.56% |
Market Cap: | £1.48bn | Yield: | 3.96% |
No of Holdings: | 44 | Ongoing Charge: | 0.93% |
Set-up date: | 6/05/11 | More details: | blackrock.com |
Manager start date: | 6/05/11 |
Source: Morningstar as at 10/04/17
Performance
Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) |
---|---|---|---|
BlackRock Continental European Income | 17.5 | 35.5 | 111.7 |
IA Europe Excluding UK sector average | 24.4 | 29.9 | 88.4 |
FTSE AW Developed Europe Ex UK TR index | 29.7 | 32.1 | 91.1 |
Source: Morningstar as at 7/04/17
Top 10 holdings as at 31/03/17 (%)
KONINKLIJKE KPN | 4.21 |
AXA | 4.11 |
BRITISH AMERICAN TOBACCO | 4.05 |
ZURICH INSURANCE | 3.94 |
VINCI | 3.93 |
NIBAIL-RODAMCO | 3.92 |
ROYAL DUTCH SHELL | 3.83 |
TELEFONICA | 3.42 |
ENDESA | 3.35 |
DEUTSCHE BOERSE | 3.06 |
Source: BlackRock
Geographic breakdown as at 31/03/17 (%)
Netherlands | 23.39 |
France | 16.45 |
Germany | 12.56 |
Italy | 9.39 |
Spain | 8.71 |
Switzerland | 7.38 |
Finland | 6.39 |
Sweden | 4.91 |
Denmark | 4.55 |
United Kingdom | 4.05 |
Cash and/or derivatives | 2.22 |
Source: BlackRock
Sector breakdown as at 31/03/17 (%)
Industrials | 32.55 |
Financials | 26.34 |
Utilities | 8.96 |
Consumer goods | 8.41 |
Telecommunications | 7.63 |
Consumer services | 5.83 |
Oil & gas | 3.83 |
Technology | 2.99 |
Cash and/or derivatives | 2.22 |
Basic materials | 1.25 |
Source: BlackRock
IC Tip rating
Tip style | Income |
---|---|
Risk rating | High |
Timescale | Long term |