Road to recovery: selectors reveal their European equity picks

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It has been a tough few years for European equity investors but where have investors focused their attentions? Citywire Global finds out the fund managers selectors are putting their money behind.

Andrew Harradine

EFG Asset Management, London

We have been strategically underweight Europe for many years given the well understood problems which have faced this region.

Structural rigidities in these economies have been a feature of  European markets for decades and more latterly the sovereign debt crisis has been our primary concern. Until recently policy responses to these issues have fallen well short.

However, we have been reducing our underweight of late to reflect reduced tail risk following ECB action which, coupled with low valuations, improves the risk/reward profile of Europe. Europe is trading close to 10-year valuation lows on price-to-book and price-to-sales.

On the fund side, we have favoured growth managers over the last three years with Allianz Europe Growth being the key play which has performed well.  Sector effects have been very powerful producing gale force tail winds for growth managers.

Consumer non cyclicals where growth funds are heavily weighted have significantly outperformed while banks and utilities which growth funds underweight have significantly lagged.

Sector effects have also benefitted European funds more generally with the median Europe ex UK fund outperforming by 71bp annualised over three years.

Looking ahead, with utilities and financials at or close to 16-year absolute and relative valuation lows and growth funds unlikely to invest in these sectors, it seems improbable that growth (and active funds on average) will have quite the same success over the next three to five years.

Indeed, with the ECB’s recent steps towards resolving the European debt crisis, we have observed a significant improvement in the performance of financials.

With this in mind, we are now moving towards a more balanced approach to investing in Europe by adding value funds and ETFs to portfolios.  

For example Metropole Euro is a value-based fund which has higher exposure to cyclicals and financials.  Other similar funds include Edinburgh Partners, a boutique firm specialising in Europe and Global value strategies.

Jens Kummer

SEB Asset Management, Frankfurt

The ongoing eurozone crisis is still casting a shadow over global equity markets. Our judgement is that the accommodative ECB programmes will be effective in clamping down the financial crisis, but the economic calamity will continue to create deflationary tendencies.

We are slightly overweight European equities based on cheap valuation and consensus underweight.

Over the next year, German equities especially, expect higher returns than global equities. However, our sentiment indicator is at an overbought position now, which typically warns of a corrective phase.

For a more aggressive positioning we wait for more fear in the market.

John Lambert

Aria Capital, Dublin

We believe if investors can filter out the market noise good opportunities are to be found. For some time now we have been increasing our exposure to markets and Europe remains a key area of our focus.

With our contrarian hats on, we have felt for almost 12 months now that, although Europe is in the news for all the wrong reasons, some parts of the market have been unfairly unloved and, therefore, under-owned in equity portfolios in favour of the safe haven status offered by the US market.

For this reason, we continue to invest selectively in European equities.

Currently, some of our preferred European equity exposures are, on the long side with funds such as Fidelity FAST Europe, Standard Life European Smaller Companies and Cazenove UK Smaller Companies. And, on the long/short side: Cazenove UK Absolute Target and BlackRock European Absolute Return.