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
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
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
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