UK investors turning to European funds amid economic rebound

UK investors appear to be slowly falling back in love with European companies after effectively shunning them in the years following Covid-19. Their reluctance was due to a combination of a global manufacturing slowdown, soaring inflation and the fall-out from Russia’s invasion of Ukraine. This resulted in the amount held within the IA Europe excluding UK sector tumbling from £65.2bn in April 2021 to just £59.7bn two years later*.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Setting the scene for investors

But the brighter economic outlook for the region has seen a resurgence of enthusiasm that has seen £3.7bn put in over the past 12 months*. This pushes the total invested in this area to £63.4bn, making it the fifth most popular sector after Global, UK All Companies, North America and Mixed Investment 40-85% shares*. As an aside, the average return achieved by a fund in IA Europe excluding UK, over the year to the end of April 2024, is 7.4%*.

Tom Stevenson, investment director at Fidelity, believes many of the headwinds endured by Europe are now turning into tailwinds. “Inflation has tumbled as the region has found alternatives to Russian gas. The jobs market is strong, so households are seeing real-term increases in spending power.”
Against this improving backdrop, he doesn’t believe European shares are highly valued. “Any shift away from the expensive US market could benefit the region,” he added.

The good news is that the IA Europe excluding UK sector is packed full of funds that are well placed to reap the rewards of improving sentiment towards the region. But where are the managers of these European portfolios focusing their attention? Which countries, industrial sectors and companies are they currently favouring?

Here we take a look at how three European portfolios on the Chelsea Selection are positioned and why these funds are worth considering for investors.

BlackRock Continental European Income

The aim of this fund is to identify undervalued European companies that offer reliable, sustainable dividends, inflation protection, and a lower level of risk. Andreas Zoellinger, who has managed the fund since its launch, is focused on fundamental company analysis, with a strong awareness of macroeconomic trends.

Danish healthcare giant Novo Nordisk is the biggest individual stock position of 5.59%, with ASML, the semiconductor company, being the next largest on 4.20%**. Industrials is the most prominent sector with a 35.44% share, while France has the highest geographic breakdown of almost 30%**.

FTF Martin Currie European Unconstrained

Ferrari, the supercar manufacturer, has the largest individual stock position of 10% in this portfolio***. This fund, which offers a focused, high-conviction portfolio of European growth companies, aims to grow in value over periods of at least five years.

We like the concentrated, unconstrained nature of this fund and the fact Zehrid Osmani, its lead manager and head of strategy, is very experienced in this area. Information technology has the largest sector allocation of almost 26%, while Italy boasts the most significant geographic allocation at roughly 19%***.

IFSL Marlborough European Special Situations

David Walton, the fund’s manager, can invest in European businesses of all sizes but will generally focus on the continent’s minnows. For example, its largest individual holding of 4% is in Sarantis**, a Greek manufacturer of consumer products, such as personal care and luxury cosmetics.

The next biggest is IPSOS**, the multinational market research and consulting firm that’s headquartered in Paris, France. The team behind this fund has expertise in small-cap investing, having enjoyed a stellar track record, as well as success in mitigating the risks. 

*Source: Investment Association, April 2024
**Source: fund factsheet, May 2024
***Source: fund factsheet, 30 April 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.