Merryn's Blog

Europe is finally looking cheap

The idea that high quality European stocks are good value is finally gaining ground.

We started telling you to buy European stocks here a few weeks ago. We've had a cover story on why one should start buying into Italyand last week's cover delved into particularly good value stocks in Europe.

But the idea that Europe is finally, finally looking cheap is beginning to gain ground. An email comes from Charlie Morris of the HSBC Wealth Opportunities Fund. He reckons that high quality European stocks now sit alongside those in Japan as compelling "value opportunities." They are also both, he thinks, a better bet than US equities, which have "run ahead of the rest due to their safe haven status."

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How's he buying? Via the EuroStoxx 50 Index on the basis that not only is it generally "dominated by global titans" but the fact that the euro crisis has now been with us for so long means that distressed stocks already have low weightings.

We've suggested various other funds as well, but one that has not been much mentioned is Alex Darwell's Jupiter European Opportunities Fund. Given that is it is the best performing of the European investment trusts over the last one, three and five years, that's an omission. So should you look at it? Maybe.

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A note from Oriel on the fund last week tells the story of Darwell being told by a potential investor that he would not invest in the fund until "the euro crisis is resolved". We reckon he'll be waiting a long, long time to invest. So does Darwell, who notes that "the deleveraging process in Europe will take a generation at least to complete".

However, Darwell claims to be not much bothered by this. His portfolio is made up of 38 companies (picked from a universe of 4,000), weighted away from financials and real estate and towards technology, healthcare and media, all of which he has, says Oriel, "a pretty thorough understanding of." As he should, given that he has known the management teams of some of them for 20 years, and that around half of the companies in his portfolio have been there for over six years.

He is basically a good stock picker focused on quality value. That's a strategy that generally works over the long term and that has also been working very well in the recent short term. Finally, it is worth noting that Darwell has significant skin in the game: he owns 5% of the £200m trust himself.

The problems? First, the fund is allowed to invest in the UK as well as in Europe, so it isn't offering pure exposure to the eurozone.

Second, it has had a good run - it has been heavily invested in the defensive names that have outperformed over the last few years. There is no guarantee that this new 'nifty fifty' trend will continue, and Darwell has little exposure to the really cheap bits of the market (the south in particular).

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And finally, the trust has a performance fee. The management fee comes in at 0.75% but there's a performance fee equal to 15% of the amount by which the NAV exceeds the index with no mention that I can see of a high water mark of any kind. Indeed, the only limit on it is one that doesn't seem much of a limit - that it can come to no more than 7.5%. In 2011 the trust paid a performance fee of over £4m. That seems excessive. See here for what might make a performance fee acceptable.



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