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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    SThree: Talent Acquisition Consultant

    £22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

    Day In a Page

    John Palmer: 'Goldfinger' of British crime was murdered, say police

    Murder of the Brink’s-MAT mastermind

    'Goldfinger' of British crime's life ended in a blaze of bullets, say police
    Forget little green men - aliens will look like humans, says Cambridge University evolution expert

    Forget little green men

    Leading evolutionary biologist says aliens will look like humans
    The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

    The Real Stories of Migrant Britain

    An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
    Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

    Dying dream of Doctor Death

    Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
    UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

    39.8 degrees recorded on Tube

    There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
    Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

    Computerised cooking is coming

    From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
    Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

    Jessie Cave's feminist cartoons

    The Harry Potter star tells Alice Jones how a one-night stand changed her life
    Football Beyond Borders: Even the most distruptive pupils score at homework club

    Education: Football Beyond Borders

    Add football to an after-school homework club, and even the naughtiest boys can score
    10 best barbecue books

    Fire up the barbie: 10 best barbecue books

    We've got Bibles to get you grilling and smoking like a true south American pro
    Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

    Nick Bollettieri's Wimbledon Files

    Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
    Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

    ‘This is one of the best McLaren teams ever – we are going to do it’

    Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
    Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

    Making of a killer

    What motivated a shy student to kill 38 holidaymakers in Tunisia?
    UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

    Just when you thought your commute couldn't get any worse...

    Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
    Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

    The Real Stories of Migrant Britain

    Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
    Cheaper energy on the way, but it's not all sunshine and rainbows

    Cheaper energy on the way, but it's not all sunshine and rainbows

    Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most