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Shelter in Europe's safe havens

The eurozone's in trouble, so buy into the UK and the best companies listed outside the eurozone.
December 1, 2011

Most observers consider that a collapse of the euro is unthinkable, for political reasons if nothing else. But given the currency bloc's history of fiddling while Rome burns, you might not to want to run the risk. So how about a Europe fund that invests in stock markets that are not right in the thick of this ailing currency?

IC TIP: Buy at $33.61
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Invests in firms outside eurozone
  • Good returns since launch
  • Low charges
  • Transparent structure
Bear points
  • Can't beat its index
  • Not immune from eurozone problems

The iShares MSCI Europe ex-EMU exchange-traded fund (ETF) tracks the MSCI Europe ex EMU Index, which offers exposure to shares listed in the UK (63 per cent of assets), Switzerland (23 per cent), Sweden (8 per cent), Denmark (3 per cent) and Norway (3 per cent). Most of the holdings are large caps, some of which are typical holdings in UK equity income funds - an area that could help investors to weather both volatile markets and above-target inflation.

Read more on asset allocation in the current environment

Read more on equity income funds

iShares MSCI Europe ex-EMU ETF has nearly 40 per cent of its assets in some of the leading companies in ex-EMU European markets, a strategy some UK equity income fund managers are also taking. Among them is Invesco Perpetual's star manager Neil Woodford; one of his biggest positions is in Swiss pharmaceutical Roche (funds in the Investment Management Association's UK equity income sector can put up to 20 per cent of their assets in shares outside the UK.)

While the ETF has not done so well in recent months, since launch just over a couple of years ago it has returned more than 40 per cent, and currently yields 3 per cent (a little less than that what you'd get from a UK equity income fund).

The fund's total expense ratio (TER) is a mere 0.4 per cent, in contrast to active funds which typically charge around 1.6 per cent.

The fund has a well diversified portfolio of around 197 shares. Like most iShares funds, it holds shres directly rather than getting its return via a derivatives-based swap. So you don't have to worry about counterparty risk. It is also well diversified across sectors - and transparent about it, too. Unlike an open-ended fund, which publishes only its top 10 holdings once a month, and often retrospectively, you can see the contents of this fund's entire portfolio on iShares' website.

Although its 18 per cent exposure to financials may be a concern, this exposure comes via stronger names: its two largest holdings in this area being HSBC and Standard Chartered. These also happen to be our preferred banking stocks, courtesy of their exposure to fast-growing Asian markets (although we're cautious on all banks right now, because of the growing regulatory threat to their profitability). Consumer staples are its second largest sector exposure and includes companies with global reach or whose products are likely to stay in demand regardless of the economic cycle - for example, Nestlè, British American Tobacco, Diageo and Tesco.

iShares MSCI Europe ex-EMU ETF can be held in an individual savings account (Isa) or self-invested personal pension (Sipp). It also has UK reporting status, meaning when you sell the shares you incur capital gains tax (CGT) rather than income tax. There's an annual £10,600 allowance for capital gains and you can offset profits against capital losses elsewhere.

The obvious downside is that this fund will never outperform its index because it is a tracker - and performance will be reduced by the 0.4 per cent TER. Also, the UK and other non eurozone countries are not immune from eurozone problems - all the countries trade heavily with the currency bloc. However, the companies the fund holds include strong multi-nationals which also trade in other parts of the world and are probably well placed to ride out the euro storm.

So, for investors who want cheap, transparent and highly diversified exposure to key European companies outside the single currency area, this looks an attractive option. Buy.

ISHARES MSCI EUROPE ex-EMU (IE00B4WXJC95)

PRICE:$33.611-YEAR PERFORMANCE:-9.52%
SIZE OF FUND:$3.3m6-MTH YEAR PERFORMANCE:-18.13%
LAUNCH DATE:17 April 2009PERFORMANCE SINCE INCEPTION: 41.27%
INDEX:MSCI Europe ex EMUTOTAL EXPENSE RATIO:0.40%
REPLICATION METHOD:PhysicalYIELD:3.04%
BASE CURRENCY:US dollarsMORE DETAILS:ishares.co.uk
TRACKING ERROR SINCE INCEPTION:-1.60% 

Source: iShares.

Performance data as at 24 November 2011.

Top 10 holdings as at 1 November 2011

Nestlè5.65
HSBC4.34
Vodafone4.01
BP3.8
Novartis3.69
Royal Dutch Shell 'A'3.59
GlaxoSmithKline3.24
Roche3.21
Royal Dutch Shell 'B'2.73
British American Tobacco2.59

Sector breakdown

Financials17.84
Consumer staples16.58
Energy15.07
Healthcare14.99
Materials10.16
Industrials8.73
Telecommunication services6.26
Consumer discretionary6.03
Utilities2.82
Information technology1.51
Engineering0.01