When it comes to summer holidays, Briton’s love Europe. It’s by far our most popular destination, with the likes of Italy, Greece, and Spain our first choice retreats as we ditch our less-than-reliable UK weather for some sand, sea, and guaranteed sunshine.
But when it comes to our investments, European equity funds are one of our least favourite choices. In fact, rather than putting our hard-earned cash into European equities or European equity funds, we’ve been taking money out for the past five years*. A huge £11 billion has been withdrawn from these investments*.
So, are we missing out on opportunities? Or are we right to put our cash elsewhere?
What is a European equity fund?
European equity funds pool together the money of lots of people and invest the proceeds in stocks listed on the different European stock exchanges. From German car manufacturers to French designers, the opportunities are wide-ranging.
What are the benefits of European equity funds?
While the aforementioned companies might be interesting to investors, it’s always dangerous to put all your eggs in one basket – or all your money in one company’s shares. Investing in European equity funds allows investors to diversify their portfolios not only by industry, but also by geography. This diversification helps reduce the impact of individual company or country-specific risks. By diversifying their investment portfolio across different European markets, investors can mitigate risks and capitalise on various growth opportunities.
What type of companies can these funds invest in?
Europe is a big place – it’s home to 50 countries and thousands of companies. So the choice is huge for investors. The Continent is particularly known for its luxury goods, specialist manufacturing and its technological advancements and innovation. But it is also home to emerging economies and companies in Eastern Europe, which have high growth potential.
What are the risks of investing in Europe?
Investors in European equities are exposed to economic conditions and political developments within the region. Factors such as economic growth, inflation, currency fluctuations, and political stability can all influence the performance of these funds.
And, just like any investment in equities, European equity funds are subject to market volatility. Fluctuations in stock prices can impact a fund’s performance, both in terms of income generation and capital appreciation.
Four reasons to invest in European equity funds today
International exposure
One of the great things about European companies is that not only are some domestically-focused – i.e. they are dependent on European consumers and the European economy – but many also generate sales from overseas. This means that if Europe is going through a hard time, not all the companies are.
One particular area of interest for Europe is Asia, and within that, China. Europe is more exposed to the Chinese economic cycle in particular, so when China’s economy is doing well, it can be supportive for European economic momentum.
European equities are cheap
Another reason to consider European equities is that they tend to be cheaper than US equities. According to Niall Gallagher, manager of GAM Star Continental European Equity fund, for most of history, there has been a discount of approximately 10% on European equities versus US equities. In the 2010s, he says that that discount became even more extreme, as the big US tech stocks pushed the US market higher.
Companies are still investing in their future
Increased capital expenditure is also a positive, according to the managers of the Comgest Growth Europe ex UK fund. “While companies remain prudent, they are not holding back on their investments,” they said. “Indeed, some are accelerating them, seeing the current environment as an opportunity to cement their leadership positions.”
Structural opportunities
There is one final reason for the wary to look again at European equities – the long-term structural trends taking place. There are a number of multi-decade spending streams from governments and companies aiming to increase energy efficiency and security, reorganise supply chains, automate and digitalise, for example.
Included in this is the Green New Deal, announced by Ursula von der Leyen, president of the European Commission at the World Economic Forum in Davos in January 2023 – where €1bn will be invested in greener energy and transport solutions, among other environmental policies, over the next decade.
Four European equity funds to consider
CT European Select
This fund invests predominantly larger European companies. The manager focuses on the structure of an industry and, within that, a company’s competitive position. Firms that can defend their margins and industries with barriers to entry are preferred.
Janus Henderson European Focus
The fund mixes big blue-chip holdings with medium-sized companies. The manager has a pragmatic approach and considers the overall macroeconomic environment and sector trends, as well as the prospects for individual companies.
IFSL Marlborough European Special Situations
This fund invests in European businesses of all sizes but focuses on the continent’s minnows. The manager scours the market looking for companies with first-class management, strong growth prospects and a share price that doesn’t yet reflect the company’s potential.
LF Montanaro European Income
This fund focuses on smaller and medium-sized businesses in Europe, which offers a huge choice of investments that are under-researched by the wider market. Each holding in the fund will also offer an attractive dividend yield, or the potential for dividend growth.
*Source: Investment Association, April 2023
