How can investors make any money in Europe? A lacklustre economy, debt-laden governments, an over-reaching bureaucracy at the core – and a central bank driven to desperation as deflation hovers ever closer blights the view. And as the UK’s referendum on the EU approaches, attention will inevitably focus on the continent’s investment charms – or lack of them.
Who would want to invest in a continent that has been one of the world’s slowest growing economic regions? It has appalling levels of unemployment, large and persistent areas of poverty and a mediocre record in attracting inward investment compared to other regions.
Yet even Brexit supporters would do well to have some continental companies in their investment nest egg. Many European companies continue to flourish and investors have done much better than the dismal macro picture would suggest.
The region has been able to deliver impressive returns. Take, for example, the 38 Europe-focused funds in the investment trust sector. Concentrating on the mainstream UK-based trusts, the performance of the top 12 of these in 2015 ranged from JP Morgan’s European Income Trust which rose 14.3 per cent – well outperforming the FTSE100 – to JP Morgan’s European Smaller Companies Trust, which did exceptionally well with a gain of 44 per cent.
Nor is this performance a one-year flash-in-the-pan. Of the UK based trusts specialising in Europe, the best performance over a five year time period was F&C’s European Assets Trust, whose shares rose a stunning 122.9 per cent. Nor did you have to hit the winning jackpot to do well: the 12th best trust performance overall across this five year period was TR European Growth with a gain of 57.5 per cent.
There are several reasons why individual European companies can perform handsomely despite the downbeat macro data. Chief among them is that many of the region’s leading companies are globally diversified, and their markets are far from confined to the continent.
There is an impressive record in engineering and technical expertise. And in areas such as design and product finish, European companies can combine high standards with creativity and flair.
Now it’s true that trust performance even within a geographically-focused sector can vary greatly. Among the 38 are niche venture capital type trusts and a fair number concentrating solely on commercial property. Some favour smaller companies, others stick to the global giants in engineering, information technology and pharmaceuticals. Take Jupiter European Opportunities, a star performer over five years but which has suffered since the start of the year with an 11 per cent fall in the share price. The shares now stand at a 5 per cent discount to net assets, which, with a low “Z” score makes it, according to Numis Securities, the “cheapest” trust in the sector. Rival Henderson European Focus Trust has seen the discount on its shares recently widen to 7.7 per cent.
However, these are far from the widest discounts on offer in this sector. Shares in TR European Growth are standing at a discount to 15.5 per cent; Fidelity European Values is sporting a discount of 13.2 per cent.
Now this comes with the important caveat that discounts should not be the only criterion for trust selection. I was caught out by this “blind spot” back in January when I overlooked European Assets Trust – the sector’s star performer over five years. Back then the shares were standing close to net asset value. And today that discount is just 0.5 per cent.
But the figure that should have caught my eye was the dividend yield. Today this stands at 5.4 per cent – and when combined with a compelling five year performance record this makes European Assets well worth considering.
So what is the case for considering a specialist European trust now? It is the increasing desperation of the European Central Bank and the knock-on effects of yet more quantitative easing and even negative interest rates on driving down the Euro. This devaluation should provide the most helpful hand-up for European exporters.
For UK investors approaching the “In-Out” referendum there is a caveat. Markets here could be volatile, particularly if the polls indicate a close result. Sentiment is likely to be dominated by short-term political uncertainty. Best – yet again – to feed in money through regular monthly amounts than opt for a lump sum where timing could backfire.