It has been a region that has rewarded investors in recent years, with the MSCI Europe ex UK index outperforming both the S&P 500 and the FTSE All Share since ECB President Mario Draghi calmed investors in July 2012, telling the market that he would “do whatever it takes” to save the eurozone.
The ECB’s most recent move to stimulate growth and avoid deflation, by introducing negative interest rates and giving cheap long-term loans to banks, is also expected to give European equities a boost in similar vein to the way in which US equities spiked following the implementation of QE3.
Therefore, in the next article in the series, we look at the IMA Europe ex UK equity income funds which dividend seeking investors may want to use to complement their income stream and diversify their portfolios.
While there are now a number of European equity income funds available to investors, two of the stand-out names in the sector are Standard Life European Equity Income and Blackrock Continental European Income.
The £1.9bn Standard Life fund, which is managed by Will James, has the longer track record after being launched in April 2009. The Blackrock fund, which is headed up by Alice Gaskell and Andreas Zoellinger, was launched in May 2011.
According to FE Analytics, James’ fund has been a second quartile performer since its launch and has slightly underperformed against its FTSE World Europe ex UK benchmark – which the Blackrock fund also aims to beat – over that time.
However, over five years – three months after its launch – Standard Life European Equity Income has been a top quartile performer with returns of 88.91 per cent, beating the index by more than 10 percentage points in the process.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
On the other hand, our data shows that Blackrock Continental European Income has been the sector’s best performing fund since its launch and has more than doubled the return of the benchmark with its gains of 45.52 per cent.
While the Standard Life fund has been a top quartile performer over that time, it has returned 31.03 per cent.
Performance of funds vs sector and index since May 2011
Source: FE Analytics
Invesco Perpetual European Equity Income, FP Argonaut European Enhanced Income and Neptune European Income have all also been top quartile performers over that time; with the three funds underperforming against the Blackrock fund, but beating Standard Life European Equity Income.
The main driver of Gaskell and Zoellinger’s outperformance has been the consistency of their returns.
The BlackRock fund was top quartile in the second half of 2011, second quartile in 2012, top quartile in last years’ bull market and currently boasts top quartile returns so far in 2014.
The Standard Life fund, on the other hand, outperformed the sector in 2011 and 2012, but was bottom quartile last year – despite its returns of more than 20 per cent – and currently sits in the third quartile this year.
The Blackrock fund has also come out on top in terms of its stock-picking record and capital preservation characteristics over the past three years as well.
While James’ portfolio has beaten the sector average for its alpha generation and its information ratio, Blackrock Continental European Income has been the best performing fund in the sector for its alpha generation and has the fifth highest information ratio.
Both funds have been top quartile for their maximum drawdown, downside risk, annualised volatility and Sharpe ratio, though the Blackrock fund has beaten the Standard Life portfolio in all four of those measurers over the last three years.
Income generation is one of the main aspects yielding-seeking investors will inevitably focus on when deciding on a fund.
Our data shows that if an investor had bought £1,000 worth of units in the Standard Life European Equity Income fund when it was launched in April 2009, they would have earned £289.05 in income. That means James’ fund has paid out more than two of its main competitors; Invesco Perpetual European Equity Income and Allianz European Equity Income.
However, while Blackrock Continental European Income does have the shorter track record, it has paid out more than the Standard Life fund over rolling one, two and three year periods.
Source: FE Analytics
Nevertheless, investors who buy the Standard Life fund now would be getting in at a yield of 3.89 per cent, which is 0.4 percentage points higher than the Blackrock and a reflection of the difference in performance of the two portfolios over the last 12 months.
The two funds are also set up very differently at the moment.
The Blackrock fund has a much lower weighting to the “core” European markets, with Gaskell and Zoellinger maintaining underweight positions in Germany, Switzerland and France. Instead, the managers have considerably overweight holdings in periphery such as Italy and Portugal.
James, on the other hand, has more in France, Switzerland and Germany than his peers at Blackrock, but is still underweight those regions relative to his benchmark.
However, he is also underweight peripheral and Southern Europe and, instead, has a high proportion of its assets invested in Scandinavia.
The Blackrock fund also has a cyclical tilt, with Gaskell and Zoellinger currently overweight financials, industrials and consumer services and underweight health care and consumer goods stocks. This positioning, along with the managers high weighting to some of the region’s most indebted countries, will have undoubtedly helped the fund to outperform recently.
Other dividend paying funds that have had similar exposure, and have been top decile over the last 12 months as a result, are Invesco Perpetual European Equity Income and Schroder European Equity Alpha Income
However, James, in his most recent note to investors, warned that European equities were now looking full valued.
Instead of chasing returns, he said he would continue to concentrate on companies that can “deliver attractive through-cycle returns driven by, for example, market share gains, restructuring, organic growth on a global scale while still continuing to pay attractive dividends to shareholders.”
The expert’s view
Darius McDermott (pictured), managing director at Chelsea Financial, says that if investor want a European equity income fund, they should choose Gaskell and Zoellinger’s Blackrock fund.
“There are around 10 European equity income funds, but the one we rate is Blackrock Continental European Income,” McDermott said. “Why do we like it in particular? Blackrock’s European team. They have three funds, the Blackrock European Dynamic fund which had to be closed because it was doing so well, the Blackrock Continental European which has a fantastic track record and the Continental Income fund, which we have supported since its launch.”
“They have around 12 analysts on the funds covering different sectors and the managers take a very pragmatic approach. They are neither value nor growth, they just tilt the fund to where they find opportunities.”
“They have the standout European equity team and while the likes of Henderson and Jupiter have very good teams as well, as we also have some of their funds on our buy list, no-one has a bigger of better team than Blackrock.”
While McDermott rates James’ abilities, he has some words of warning for any potential investors into the Standard Life fund as it is used by the group’s Global Absolute Return Strategies [GARS] team.
“The fund is £1.9bn, but the question is how much of that is money from GARS? I would suspect it is the vast majority, possibly £1.5bn. That makes the fund a very different proposition.”
The Blackrock fund’s clean share class has an ongoing charges figure (OCF) of 0.93 per cent, which is 0.03 percentage points more than the Standard Life fund.
