Mark Dampier: Europe prospects up despite pressure

The Analyst

Over the past year, and particularly last summer, I mentioned on a number of occasions that European stock markets looked good value on many measures. Our own analysis suggested stock markets looked significantly cheaper than their long-term average. While this alone can't be considered a definite buy signal, it can suggest much of the downside is already priced in. A year later and the European stock market, as measured by the FTSE AW Europe ex.UK Index, has risen 26 per cent with dividends reinvested.

Despite this, some funds have not performed as well as I would have expected. One is Schroder European Alpha Plus, which has returned a decent 24 per cent but still lagged the wider stock market. The fund is managed with a focus on quality businesses with strong growth potential. Around a core of businesses that fit the bill from this perspective, however, are a number of companies more sensitive to economic growth; those that have underperformed or become unloved, and those restructuring.

Leon Howard-Spink, the fund's manager, confessed his performance had not been good enough. The top four companies that contributed negatively to performance cost him 3.5 per cent over the period. They have all now been sold. Three of the stocks – Saipem, Fugro and Vopal – suffered from profit warnings related to the energy market, and the latter two had been successful long-term holdings so all was not lost. The fund now has no exposure to the major oil or oil-service companies.

Mr Howard-Spink says his style of focusing on quality companies with growth potential has been out of favour. Unloved value companies with recovery potential have tended to perform better, and he tends to hold less in these stocks. Instead, he has focused on companies with high cash flow and return on equity, and lower debt, but which still look good value. Surprisingly, companies with these characteristic have not performed as well over the short term.

Quality companies with global growth potential have become more expensive, and Mr Howard-Spink has made adjustments to reflect this. He has added names he held in the past such as Syngenta. He is also keen to get new ideas into the fund, and wants the top three contributors over time to be an eclectic mix of companies, not just household names. He has also increased exposure to higher-risk smaller and medium-sized companies. GEA Group, for example, is a German food-processing equipment maker. It sells a lot to the emerging markets, and Mr Howard-Spink believes earnings should continue to rise and the valuation is reasonable.

The top three contributors to performance over the past year have been banks – BNP, DNB and UBS. He has tended to be underweight banks for his whole career, but as a stock-picker is willing to use his flexibility to seek opportunities in a variety of sectors. He wants to maintain a diversified portfolio which might provide some relative shelter from a tough economic environment, but equally could perform well in a recovery. That said, he is keen not to over-diversify the portfolio, so has reduced the total number of companies held to 38.

Mr Howard-Spink still believes European stock markets are cheap, and describes himself as cautiously optimistic. We could see more market volatility in the coming weeks. However, Mr Howard-Spink has a long and successful track record, and his recent underperformance can be partly explained by his style being out of favour.

I would be tempted to use any further weakness as a chance to top up, as I would expect long-term investors to be rewarded.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Life and Style
Customers can get their caffeine fix on the move
food + drink
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
News
peopleEnglishman managed the quintessential Hollywood restaurant Chasen's
PROMOTED VIDEO
Voices
Mosul dam was retaken with the help of the US
voicesRobert Fisk: Barack Obama is following the jihadists’ script
Arts and Entertainment
Flat out: Michael Flatley will return to the stage in his show Lord Of The Dance
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Loaded weapon: drugs have surprise side effects for Scarlett Johansson in Luc Besson’s ‘Lucy’
filmReview: Lucy, Luc Besson's complex thriller
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
News
Jermain Defoe got loads of custard
i100
News
peoplePamela Anderson rejects ice bucket challenge because of ALS experiments on animals
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Centre Engineer - Linux, Redhat, Solaris, SAN, Puppet

    £55000 per annum: Harrington Starr: A financial software vendor at the forefro...

    .NET Developer

    £600 per day: Harrington Starr: .NET Developer C#, WPF,BLL, MSMQ, SQL, GIT, SQ...

    Data Centre Engineer - Linux / Redhat / Solaris / Puppet / SAN

    £65000 per annum: Harrington Starr: A financial software vendor at the forefro...

    Business Analyst

    £250 - £350 per day: Orgtel: Business Analyst, Bristol, Banking, Business Obje...

    Day In a Page

    Air strikes? Talk of God? Obama is following the jihadists’ script

    Air strikes? Talk of God? Obama is following the jihadists’ script

    The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
    Ebola outbreak: Billy Graham’s son declares righteous war on the virus

    Billy Graham’s son declares righteous war on Ebola

    A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
    Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

    Not even Jeremy Clarkson is bigger than the BBC, says TV boss

    Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
    Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

    Nick Clegg the movie

    Channel 4 to air Coalition drama showing Lib Dem leader's rise
    Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

    Philip Larkin: What will survive of him?

    Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

    Waxing lyrical

    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
    Texas forensic astronomer finally pinpoints the exact birth of impressionism

    Revealed (to the minute)

    The precise time when impressionism was born
    From slow-roasted to sugar-cured: how to make the most of the British tomato season

    Make the most of British tomatoes

    The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
    10 best men's skincare products

    Face it: 10 best men's skincare products

    Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
    Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

    Mackay, Moody and another grim day for English football

    The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
    La Liga analysis: Will Barcelona's hopes go out of the window?

    Will Barcelona's hopes go out of the window?

    Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape