Dive in, the eurozone waters are looking lovely (despite the odd lurking danger)
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Europe is bouncing back, at least for now. Populist anti-EU candidates have failed to win a series of elections, annualised growth in the eurozone has picked up to nearly 2.5% and the MSCI European index, excluding the UK, has returned more than 10% in euros in the year to date and more than 25% over 12 months. Sceptics warn that the pick-up in growth could prove a flash in the pan, as structural growth rates remain low. But whatever the outlook for the broader economy, the financial system and the euro, Europe remains home to a significant number of successful, world-leading companies.
This makes it a hard region for global investors to ignore. Europe's solid firms have enabled Alex Darwall, manager of the £775m Jupiter European Opportunities Trust (LSE: JEO), to express optimism about the outlook for his portfolio throughout the protracted eurozone crisis. Sensibly, he avoids macro-economic and political forecasts and invests in companies which are either immune to the ups and downs of the region or able to "profit from the discomfort of others".
His portfolio, a third of which is listed in the UK, is concentrated, with the top-ten holdings accounting for 72% of the total value. Turnover is low, with last year's 14% being typical. The fund's return of 58% over the last three years, 13% ahead of the benchmark, is the best in the sector, but it faltered in 2016 owing to a large holding in Danish pharmaceutical company Novo Nordisk. Worries about pricing pressure in the US saw the shares drop by half, but Darwall's decision to hold on is justified.
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The best performer over five years is the £287m Henderson European Focus Trust (LSE: HEFT), managed by John Bennett. The return of 147% is 41% ahead of benchmark and it is also ahead over one and three years. The trust doesn't invest in UK stocks, but focuses on mid-cap companies with a market value of under €5bn. These make up 35% of the portfolio, three times the weighting in the benchmark index. Bennett also has a £4m stake in the trust, so is strongly motivated to perform.
Fidelity European Values (LSE: FEV) is the giant of the sector, with a market value of more than £900m. Performance over one and three years is competitive, though this followed a couple of dull years that have held back the five-year record. Unlike the other two trusts, it trades at a discount to asset value, which gives scope for a catch-up if performance remains good. Manager Sam Morse remains positive on the grounds that monetary policy remains very loose, the region is not in fashion and both earnings and dividends are growing with forecasts being revised up. However, he points out that valuations are no longer cheap and warns that adverse politics, higher bond yields and over-optimism are "potential party poopers".
Tim Stevenson, manager of the £240m Henderson EuroTrust (LSE: HNE), with a solid record over all time periods, deserves the final comment. "Market timing," he says, "is incredibly difficult. Markets are historically high but interest rates are extremely low. Dividend yields of roughly 3% are extremely attractive relative to German ten-year bond yields below 0.5%." Eurosceptics will be drawn to Jupiter European and euro-optimists to the other three but, whatever your view, this is still a region to invest in.
Activist watch
Hedge-fund mogul Bill Ackman is angling for five seats on the ten-member board of payroll processor ADP after disclosing last week that his fund, Pershing Square Capital Management, owns an 8% stake in the company, says Michael J de la Merced in The New York Times. Pershing Square has asked that a deadline for nominating directors be extended so that it can put up five candidates in time for this year's annual shareholder meeting.
In a statement, ADP said that is "open to constructive input fromshareholders", but pointed out that the 2017 deadline for director nominations "has been public for nearly a year". ADP also confirmed that Ackman has asked for ADP's chief executive, Carlos A Rodriguez, to be replaced.
Funds news round-up
Fund investors have flocked back into the market this year after fleeing it in 2016, notes Michelle McGagh on Citywire.co.uk. In the first half of the year they invested a record-breaking £18.4bn in funds, with the total sum under management now at £1.1trn. In June a net £3bn poured in, neatly reversing last June's £2.9bn outflow. All asset classes reported an uptick in the first half, with mixed asset funds doing best, followed by bond funds. Equities gained £4.1bn. Nevertheless, dig a bit deeper and it's clear investors remain nervous about the domestic outlook. UK equities are still unpopular, losing £1.1bn of investors' money in June. The current fashion for targeted absolute-return funds June's No. 2 category also suggests investors aren't rampantly bullish.
Some media enterprise investment schemes (EIS) appear to be relying on tax relief to produce a return, says Vanessa Houlder in the FT. Research by Allenbridge suggests that a third of the biggest media EIS have minimum return targets that failed to break even on pessimistic assumptions. That's before taking into account the tax relief for investors worth 30p in the pound. High and opaque fees are also eating into returns. Martin Sherwood of the EIS Association says fees are usually around 12%, but some funds charge more than 20%.
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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