Three funds for... a pro-Europe investor

In the first of our 'Three funds for...' series, a hypothetical Mr Davis has a medium attitude to risk and wants to move from an underweight to a neutral position in Europe. Ken Rayner, director of Rayner Spencer Mills, suggests a package of three Europe ex-UK funds that could suit his needs.

Over time, many clients find their portfolio becomes unbalanced as different investments perform with varying results.

Our hypothetical client, Mr Davis, is looking to re-balance his portfolio on a three to five-year view. Having been considerably underweight in Europe, Mr Davis has read that there are now significant opportunities with valuations looking more favourable and he wants to bring the portfolio exposure to a neutral position by investing into two Europe ex-UK funds.

Mr Davis has a medium attitude to risk, and so will be bringing the overall percentage weighting to Europe to 12% of his portfolio. He would also like a third option to consider for possible further diversification of the investment.

Europe as a sector can be used to diversify away from a pure UK portfolio but with the knowledge the two regions are very closely linked. Europe gives the UK investor access to a broader range of companies with an increasing emphasis on shareholder value and greater exposure to global trade cycles.

A balanced portfolio

Over the past year there has been a significant deterioration in European economic data and, in particular, the problems in peripheral debt have not fully been resolved. The past few months have seen the crisis deepen as a Greek default becomes increasingly likely against a backdrop of slowing economic growth worldwide. Therefore, European equities have been a poor relative performer. That said, Europe does still present significant opportunities over the longer term and should be considered for a balanced portfolio.

Our approach to fund selection is to look initially for a core fund which will represent its sector in a balanced way, probably being biased to large and mid cap companies. It should be a fund that will provide general exposure to the market without being strongly biased in any direction. To complement this, we then have a fund which we would view as satellite, which provides a different investment approach and diversification at both a style and stock level.

Fund picks

Our first fund choice is the BlackRock Continental European fund. We would view this as a core holding in Europe; it combines top down and bottom up stock selection criteria and has a large cap growth bias with a tilt to mid caps. As this is core to Mr Davis’s European holding, we would suggest an allocation of 7% of the total 12% allocated to Europe.

The BlackRock European team is headed by Nigel Bolton, with the fund manger Vincent Devlin having worked with him for a number of years. The overall ethos of teamwork is key and is demonstrated by all team members having sector analytical responsibilities. Starting with a universe of around 3,000 possible stocks, the first stage in the screening looks at growth, valuation and momentum.

From this, around 350 stocks are then subjected to in-depth research. Analysts conduct this research and then present ideas to the team for discussion, looking for stocks that are attractive on a three-year forecast relative to their own history.

Our second fund, the Henderson European Special Situation fund is used as a satellite holding, complementing the core BlackRock fund for the remaining investment. This fund is quite concentrated, with a focus on mid cap stocks and a bias towards growth stocks.

The manager focuses on businesses with reasonable valuations, and consequently it has a bottom up investment style with a low reliance on macro views. The fund operates with an unconstrained mandate and is therefore free to deviate considerably from index weightings. The fund will hold the managers’ best stock ideas and these ideas will determine both the country and sector makeup of the fund.