Offset UK risk with BlackRock Continental European Income

Equity income funds that invest outside the UK could help to mitigate these risks. Europe ex-UK equity funds are a good solution because a number of global companies with strong brands that pay attractive dividends are listed on these markets, such as food producer Nestlé (NESN:VTX). 

A good way to tap into these kinds of companies is BlackRock Continental European Income fund (GB00B3Y7MQ71), which aims for an income above the yield of European equity markets and capital growth over the long term.

The fund is managed by Andreas Zoellinger who looks for companies that offer reliable dividends. The fund's investment policy does not stipulate that the shares it invests in must have a specific level of yield, so Mr Zoellinger searches for three types of companies. These are companies with a high and secure yield, high dividend growth companies with low yields, and quality companies that offer solid yields and dividend growth with a high degree of predictability. He may also invest in companies that are not included in the fund's benchmark, FTSE All World Developed Europe ex UK index, and transferable securities, money-market instruments, deposits, cash and near cash, collective investment schemes and derivatives, although these are likely to account for a very small portion of the fund's assets.

Mr Zoellinger targets large- and mid-cap equities, and the fund’s largest holdings are German insurer Allianz (ALVX:GER), French pharmaceutical company Sanofi (SAN:PAR) and Nestlé. The fund's largest sector exposure is financials, which accounted for 31 per cent of its assets at the end of April.

The fund's investment team also follow a rigorous risk control process to reduce volatility, meaning the fund is less volatile than FTSE Developed Europe ex UK index.

So far Mr Zoellinger's strategy seems to be working. The fund has an attractive yield of 4.2 per cent and consistently outperforms its benchmark, FTSE Developed Europe ex UK index. In most years since its launch BlackRock Continental European Income has made double-digit total returns, although last year the fund and FTSE Developed ex UK index made negative returns. This was because of concerns on the weak European economy, US-China trade tensions and Brexit. But the fund fell less than the Investment Association (IA) Europe ex UK sector average – 9.73 per cent compared with 12.16 per cent.

Although the fund has a good long-term performance record, much of this was achieved when it was jointly run by Mr Zoellinger and Alice Gaskell, who left last year. Continental European economies also face political uncertainty which could cause market volatility. For example, France and Germany, where the fund has a substantial portion of its assets, are experiencing a rise in populist and or eurosceptic movements which are making many investors jittery. 

However, while Mr Zoellinger has been the only named manager since Ms Gaskell left he is supported by two income-specific analysts and 16 members of BlackRock’s European team. Some analysts are optimistic on the growth prospects for European markets because of falling unemployment rates, rising wages and significantly reduced oil prices, which are indicative of an improvement in consumer spending. And, in any case, many of the companies the fund holds are global multinationals that do not only depend on Europe for their revenues, so could still make a profit and pay dividends if the economic picture in this region is not as strong.

So, if you have a long-term investment horizon and can sit through bouts of market volatility, BlackRock Continental European Income still looks like a strong choice for an attractive income and diversification away from the UK. Buy. ZB