Last updated: May-24-2019

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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Thursday, June 01, 2017

One might be forgiven for believing that in light of all its recent problems, Europe would be a dangerous place to invest these days. After all, there have been serious and seemingly unresolved economic problems in Greece, Italy, and to a lesser extent Portugal and Ireland. There’s been Brexit, with concomitant concerns about the continuing viability of the rest of the eurozone. Now a war of words has erupted between the U.S. and German leaders.

But hold on – the latest Fundata statistics show that contrary to such beliefs, European equity funds have actually been one of the best places in the world for investors in recent months, ranking first or second in performance among all fund categories for the 1-, 3- and 6-month periods ended April 30, 2017. Even the 5-year average annual compound rate of return of 11.9% is in the top quartile.

So what gives? Are we talking about two separate worlds?

It would seem so, according to Martin Fahey, Dublin-based portfolio manager of the two-time Fundata FundGrade A+ Award-winning Investors European Mid-Cap Equity Fund. The fund is one of the top performers in the category, with 1- and 5-year returns of 14.8% and 15.0% respectively. “Europe has been largely ignored by U.S. investors, who are big swing investors,” he says. “It’s been seen as a basket case, and the European Union hasn’t helped itself in its dealings with Italy, Greece, the U.K....

“But it’s said that equities climb walls of worry, and the markets have been relatively strong over the past few years despite political concerns,” Fahey says. “After Brexit the market moved down, but then it rallied hard. Meanwhile, the problems in Italy have been largely deferred until after the election next year. France has been sorted out, in that they’ve elected the leader most favorable for equity markets.

“We believe that the worst of the political risks is largely behind us,” Fahey adds, suggesting that this development, combined with other factors, portends stronger growth. “The market discounted a more negative outcome in France, and valuations are lower than in the U.S. Earnings revisions have been higher than in the U.S. over the past year. Economic growth has improved, and we just had the best Quarter One in the past 10 years. The euro is stronger now than in the past 12 years.”

Meanwhile, Fahey’s GARP (that is, Growth at a Reasonable Price) investment strategy remains unchanged. “We look for mid-cap companies with strong growth potential over the next two to three years,” he says. “Although we have some value holdings, we’re biased to growth stocks – companies with strong balance sheets, or the ability to sell assets, at reasonable valuations. And we like companies that are exposed to growth themes.”

One such theme is video gaming, as reflected by Rennes, France-based Ubisoft Entertainment SA (PAR: UBI), a multinational video game publisher. “They’re a growing company in a growing industry,” says Fahey. “People are spending less time watching TV and more time on video games and the Internet, so Ubisoft is ideally placed, and they’ve been a great performer.”

Another theme is the emergence of electric vehicles, represented by Bietigheim-Bissingen, Germany-based Duerr AG (ETR: DUE), which provides equipment and services, including paint shops, for the auto industry. “They’re the global leader in paint shops, most of which are now aged and in need of replacement, or in Asia they need to be built,” says Fahey. “They’re also very strong with robotics, and are working with Tesla to automate their factory and make the production process more efficient.”

Yet another theme is health care. Fahey likes Bad Homberg, Germany-based Fresenius SE & Co. KGaA (ETR: FRE), which offers products and services for kidney dialysis. “They run the largest hospital networks in Germany and Spain,” says Fahey. “Diabetes is becoming more common as more people become unhealthy.”

Renewable energy and on-line payments are two more current themes in a portfolio likely to gather speed as the European economy continues to improve and political issues and uncertainty are further resolved. “Everybody thought [the European Union] would collapse after Brexit, but if anything, it’s been brought closer together,” says Fahey. “Now they all have a common enemy in the U.K.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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