European equities were expected to be among the best performing areas in 2017, but their performance relative to other markets was lacklustre. And poor economic data for that region so far this year means that they have fallen even further out of favour.
Strong long-term performance
Diversified across sectors and regions
Small-cap growth potential
Volatility
Macroeconomic uncertainty
But this means broad company valuations remain lower than average. And if the economic situation improves, the market could too, so now could be a good time to buy European equities.
MSCI Europe ex UK index has been generally flat in the year to date. Although it rose 17 per cent in 2017 this was mainly driven by eager investors in the first half of the year – it increased 14 per cent in the first six months and 3 per cent in the second half. So some believe that company valuations remain depressed as expectations never translated into central bank action or buoyant macroeconomic data, and that any slight upturn in economic fortunes could spur markets on. Corporate earnings from the first quarter have also begun feeding through with many providing a positive surprise.
Seema Shah, global market strategist at Principal Global Investors, believes the current cooling in eurozone growth is just a "pot hole". She expects the central bank to start withdrawing its stimulus programme and start raising interest rates in the coming 12 months, based on evidence that economic growth and inflation have returned to the region - a positive environment for stocks.
A good way to capture any upturn early on is to have exposure to investments in different market cap segments, sectors and geographies, via a good number of stocks. And a fund that offers this is Marlborough European Multi-Cap (GB00B90VHJ34).
The fund aims to benefit from any slight turn in economic fortunes, although its managers pick stocks based on their own merits rather than economic fundamentals. Lead manager David Walton, who has been a European small-cap manager for 25 years, prefers micro and small-cap stocks so the fund is more exposed to the domestic European economy. But he and deputy manager Will Searle also include large companies, and can invest in companies of whatever size they like.
The fund currently has 31 per cent of assets in small-caps valued between £250m and £1bn – its largest allocation – with 16 per cent in stocks with a market cap under £250m and 8 per cent in stocks with a market cap of £5bn or more.
The fund is well diversified with 134 stocks, the largest of which only accounts for 1.7 per cent of its assets. This means a geographically-broad European economic recovery should particularly benefit the fund, but it has exposure to enough potential drivers of return to keep performance steady in more subdued periods such as at present.
This has been demonstrated by Mr Walton's performance record. For example, over three years the fund is the best performer in the Investment Association (IA) Europe ex-UK sector, beating its closest rival by 20 per cent with an 83 per cent return. In 2017, when MSCI Europe ex UK index returned 17 per cent the fund returned 22 per cent. And year-to-date while this index is down 1.3 per cent the fund is only down 0.6 per cent.
Marlborough European Multi-Cap has nearly half of its assets in smaller and micro-cap companies, meaning that the potential for losses is significantly higher than for European equity funds focused on larger, more stable companies. It also means this fund is likely to be more volatile, so is only suitable if you can hold it for the long term and tolerate the downs with the ups. It is also far from certain that European economic growth will become stronger.
However, this fund's managers select shares that have good fundamentals regardless of economic conditions, and their choices have resulted in good long-term returns. So while European stocks are on more attractive valuations, Marlborough European Multi-Cap Fund could be a good way to buy into a well-diversified spread of small and large growing businesses across Europe. Buy. TL
Marlborough European Multi-Cap Fund (GB00B90VHJ34)
PRICE | 477p | MEAN RETURN | 22.38% |
IA SECTOR | IA Europe ex-UK | SHARPE RATIO | 1.33 |
FUND TYPE | Unit trust | STANDARD DEVIATION | 2.62% |
FUND SIZE | £394.4m | ONGOING CHARGE | 0.86%* |
No OF HOLDINGS | 134 | YIELD | 1.02% |
SET UP DATE | 31/12/2012* | MORE DETAILS | marlboroughfunds.com/funds |
MANAGER START DATE | 01/10/2013* |
Source: Morningstar as at 30.04.2018, *Marlborough as at 31.03.2018
Performance
Fund/benchmark | 1-year total return (%) | 3-year cumulative return (%) | 5-tear cumulative return (%) |
Marlborough European Multi-Cap fund | 7.03 | 83.23 | 120.56 |
IA Europe ex-UK sector average | 7.1 | 30.93 | 65.84 |
MSCI Europe ex UK index | 5.8 | 26.02 | 59.86 |
MSCI Europe ex UK Small Cap index | 12.96 | 57.27 | 118.37 |
Source: FE Analytics as at 30.04.2018
Top 10 holdings as at 31 March 2018 (%)
Ebro Foods SA | 1.7 |
Ercros S.A | 1.6 |
Sbanken | 1.5 |
Kaufman & Broad S.A | 1.3 |
Telepizza | 1.3 |
Scor S.A | 1.3 |
NN Group | 1.2 |
Swedol AB | 1.2 |
Fluidra SA | 1.2 |
FBD Holdings | 1.2 |
Geographic breakdown (%)
Sweden | 15.9 |
France | 12.5 |
Italy | 11.1 |
Germany | 7.2 |
Spain | 7.2 |
Norway | 6 |
Ireland | 4.8 |
Denmark | 4.8 |
Finland | 4.40 |
Netherlands | 2.70 |
Other | 6.50 |
Cash | 16.90 |
Source: Marlborough as at 31.03.2018