Funds find a safe European home as the world goes crazy

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The Independent Online
DESPITE the setback in world stock markets during the past couple of months, investors in European unit and investment trusts must be feeling pleased with themselves. As the tables show, anyone who has held units for more than a few months is sitting on sizeable gains.

There are more than a dozen European investment trusts and 125 unit trusts. Actively managed funds do well in Europe: unlike most UK-based funds, they have beaten pan-European indices over time.

So what makes for a top performing European fund? "We are very focused on companies that are growing rapidly," says Rory Powe, fund manager of the pounds 530m Invesco European Growth fund, the best performer over the long term.

"We invest in those that occupy a dominant market position and that can continue to grow within their national economies, despite the state of the economic cycle."

Managers at the best-performing funds search out companies that meet their investment criteria rather than decide to put a set percentage in each country based on its share of the European market.

"However, we never have more in a country than 10 percentage points more than its share of the index," says Mr Powe. "In the case of Germany - around 21 per cent of the European index - we'll never have more than 31 per cent."

When it comes to looking at business sectors, many of the top funds have portfolios heavily skewed to investment in service companies.

Mr Powe says: "It is difficult to find fast-growing manufacturers. They are at a competitive disadvantage because of the high labour and social costs in Europe. So we don't have large holdings in chemical, motor, pulp and paper, and so on. Instead we prefer areas such as telecommunications, health-care and business software."

Until a few years ago most mainland European companies were run as private empires. They paid scant attention to their shareholders and saw no need to have meetings with their investors. If they wanted to expand, they had a cosy chat with their bankers. Now they have learnt about equity capital and increasing shareholder value. Low inflation has meant that raising equity is cheaper than borrowing money. In return, investors expect long term growth and increasing dividends. This is something that the companies have learnt to deliver. "We look for above-average returns from taking below average risks," says Charles Glasse of M&G. "The restructuring of European companies over the past few years has given us plenty of good choices."

And this trend is expected to continue. Most fund managers are looking to Europe to provide the safest investment haven, as well as being able to produce attractive growth for the foreseeable future.

The single currency will have a massive impact on these funds. Vicky Hastings, a fund manager with the pounds 1.1bn Mercury European Privatisation Fund, points to the stimulus this is expected to give to the stock markets of the 11 countries that will be in EMU at inception. She says the single currency brings "the prospect of even lower inflation and lower interest rates in these countries that are still recovering from recession" and that the outlook for European shares is very positive. Rory Powe, of Invesco, agrees but he does add a note of caution, warning that Europe cannot be isolated from the bearish winds that are affecting all the main stock markets. He believes investors may find medium term gains lower than we have seen over the past few years. "The European market will still perform well over the long term but it may become more difficult for the immediate future," he says.


Fund Growth %

Baring German Growth (ut) 49.3

Invesco European Growth (ut) 44.8

CF Odey European Acc (ut) 42.6

Invesco European Small Cos (ut) 39.3

Newton European (ut) 36.9

Royal London European Growth (ut) 36.5

Martin Currie European (IT) 36.4

F&C European Exempt Inc (ut) 36.4

Gartmore European Sel Opps (ut) 34.7

CU PPT Europe Growth (ut) 34.5

Average European investment trust 21.0

Average European unit trust 21.6

FT/S&P World - Europe Index 18.5


Fund Growth %

TR European Growth (IT) 240.4

Invesco European Growth (UT) 209.5

Gartmore European Sel Opps (UT) 206.0

Invesco European Small Cos (UT) 197.6

Threadneedle Euro Sel Gt Acc R (UT) 196.3

Jupiter European (UT) 182.7

Baring Europe Select (UT) 177.2

Royal London European Growth (UT) 166.7

Friends Prov European Growth (UT) 164.4

Average European investment trust 111.1

Average European unit trust 115.8

FT/S&P World - Europe Index 101.4


Fund Growth %

Invesco European Growth (UT) 540.4

Jupiter European (UT) 505.5

Invesco European Small Cos (UT) 504.5

Baring European Growth (UT) 503.7

Scottish Widows European (UT) 496.9

Gartmore European Sel Opps (UT) 492.9

Friends Prov European Growth (UT) 488.6

Old Mutual European (UT) 482.7

Royal London European Growth (UT) 480.1

Fidelity European (UT) 469.4

Average European investment trust 363.4

Average European unit trust 345.5

FT/S&P World - Europe Index 309.9