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Ride Europe's recovery with BlackRock Continental European Income

BlackRock Continental European Income Fund offers an attractive yield and exposure to recovery in Europe
April 12, 2017

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.

IC TIP: Buy at 151.5pp
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points
  • Good performance
  • Attractive yield
  • Experienced managers
  • Exposure to European recovery
  • Lower than average risk
Bear points
  • 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:151.5p3-yr mean return:11.13%
IA Sector:Europe Excluding UK3-yr Sharpe ratio:0.96
Fund Type:Unit trust3-yr standard deviation:10.56%
Market Cap:£1.48bnYield:3.96%
No of Holdings:44Ongoing Charge:0.93%
Set-up date:6/05/11More details:blackrock.com
Manager start date:6/05/11  

Source: Morningstar as at 10/04/17

  

Performance

Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
BlackRock Continental European Income 17.535.5111.7
IA Europe Excluding UK sector average24.429.988.4
FTSE AW Developed Europe Ex UK TR index29.732.191.1

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 INSURANCE3.94
VINCI3.93
NIBAIL-RODAMCO3.92
ROYAL DUTCH SHELL 3.83
TELEFONICA3.42
ENDESA3.35
DEUTSCHE BOERSE3.06

Source: BlackRock

  

Geographic breakdown as at 31/03/17 (%)

Netherlands23.39
France16.45
Germany12.56
Italy9.39
Spain8.71
Switzerland7.38
Finland6.39
Sweden4.91
Denmark4.55
United Kingdom4.05
Cash and/or derivatives2.22

Source: BlackRock

 

Sector breakdown as at 31/03/17 (%)

Industrials32.55
Financials26.34
Utilities8.96
Consumer goods8.41
Telecommunications7.63
Consumer services5.83
Oil & gas3.83
Technology2.99
Cash and/or derivatives2.22
Basic materials1.25

Source: BlackRock

 

IC Tip rating

Tip styleIncome
Risk ratingHigh
TimescaleLong term