Given ongoing geopolitical uncertainty and the potential for monetary tightening in Europe, it is now prudent to tread carefully, warns Darius McDermott as he highlights five European equity funds that could fit the bill
All eyes are back on Europe. After months of political deadlock in Germany, Angela Merkel has finally secured a fourth term with a new coalition deal while, in Italy, the recent election has resulted in a hung parliament after the populist League and Five Star Movement parties made big gains.
But what does the continuing rise of populism and the potential for a grand coalition in Italy mean for investors? According to Fidelity International portfolio manager Claudio Ferrarese, the exact market reaction would depend on how diluted the Five Star Movement would be in such a coalition.
"The softer their stance, the better it will be for Italian government bonds - at least initially," he said. "The market does not like uncertainty so it makes sense the initial reaction might be a cold one until the fiscal path taken by the new government is better known."
At FundCalibre, we are positive on European equities and have been for some time - certainly on relative valuation grounds compared with the broader market. We also like Europe because of the increasingly positive economic data coming through, as well as the fact its companies appear to be in better shape than they have been for some time
That said, given ongoing geopolitical uncertainty and the potential for monetary tightening, it is now prudent to tread carefully. With that in mind, here are five European equity funds we believe will continue delivering strong returns over the medium to long term.
* Mirabaud Equities Europe ex UK Small & Mid Cap: This high-conviction fund, which is headed up by Ken Nicholson, looks for the hidden champions further down the capitalisation spectrum other funds may have overlooked. It aims to beat its MSCI Europe ex UK Small Cap index by 3% annually over the long term and does so focusing entirely on individual company fundamentals. Given the manager ignores European politics and most macroeconomic factors, this fund should perform well regardless of the backdrop.
* Janus Henderson European Selected Opportunities: Managed by John Bennett, this large-cap-focused fund adopts a style-agnostic approach to portfolio construction. Not only will Bennett hold value or growth plays as and when he sees fit, he also blends stock-specific fundamentals with thematic investment ideas. Over the long term, this has led to both downside protection during times of macroeconomic hardship and upside during rallying market conditions - though, of course, past performance is no guide to future returns.
* T. Rowe Price European Smaller Companies Equity: As a pan-European option, this fund holds approximately 30% in UK equities alongside continental European stocks. Manager Ben Griffiths generates most of his investment ideas from individual company meetings. This results in a highly-diversified portfolio of companies that can be as small as €100m (£89m) in size. To minimise risk, the fund tends to hold at least 100 stocks at any one time.
* Jupiter European Opportunities Trust: Another pan-European offering, this fund is headed up by Alexander Darwall. The manager adopts a value-aware and bottom-up approach to stock selection, which results in a highly concentrated portfolio. Its top 10 holdings account for approximately three-quarters of the overall trust, 13.7% of which is held in single largest stock Wirecard.
* BlackRock Continental European Income: Finally, for investors looking to receive income from their investment, this fund could be a good option. Managers Alice Gaskell and Andreas Zoellinge invest predominantly in European mid and large-caps which are at least £1bn in size, which means they have an investable universe of 300 to 350 stocks to choose from. The portfolio has a focus on producing an above-average yield with below-average volatility and does so through seeking undervalued stocks with sustainable dividends.
Darius McDermott is managing director of FundCalibre
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