Risk of a catastrophe in the region reduced considerably
When the European Central Bank announced that they would be buying an unlimited number of bonds to help inject liquidity into the Eurozone’s fragile economy, the likelihood of a big blow-up in the region was lessened considerably. While the risks may be lessened, the debt crisis is still far from being solved and until it is, there is still considerable uncertainty that needs to be addressed.
The region remains mired in the grips of a severe economic recession and many governments are introducing potentially stifling austerity measures as they grapple with their crippling debt loads. Add to that the recent equity rally may have pushed valuations ahead of the fundamentals and there are many reasons to remain cautious about the region.
Out of this crisis, there are also potentially some attractive opportunities. While the timing may not be perfect, some contrarian investors with a very high appetite for risk may want to look at dipping their toes into the region. If you are one of those investors, we have identified three funds which we believe will give you the best chance of making good returns in Europe. Our picks are:
Mackenzie Ivy European Fund Class (MFC 1565) – This is by far our most conservative pick of the group and like all funds that carry the Ivy banner, it avoids highly levered companies and banks with complicated structures. Instead, they look for stable companies with clean balance sheets, good management, healthy profitability and sustainable competitive strengths. The portfolio itself is fairly concentrated holding approximately 20 names. While the characteristics may indicate that this is a value fund, valuation is considered only after the quality of a business has been determined.
It is defensively positioned with very little exposure to cyclical businesses and holds around 9% in cash. Because of this, it is expected to lag when markets move sharply higher. For example, as of October 31, the MSCI Europe Index gained 11.6% in Canadian dollar terms, while this fund gained 5.9%, lagging its peer group.
This is our top pick for one reason – quality. It invests only in quality companies and as a result is much less volatile and will hold its value much better in periods of extreme market volatility. Case in point, the index is down 4.7% over the past five years, yet this fund has generated a positive return of 2% in the same period. Given that much headline risk remains in Europe, this fund should hold up well for investors looking to make baby steps into the region.
CIBC European Equity Fund (CIB 494) – While this fund can invest in both medium and large companies in Europe, it is current focused on the bigger names. They look for companies that are global and market leaders that have strong management teams, attractive growth prospects and reasonable valuations. This is a more aggressive offering than the Ivy offering. It has more pop to it on the upside, but it will also be hit harder when markets drop. It is growth oriented in its approach which results in higher levels of volatility. We believe that this is a good pick for higher risk investors looking for a momentum play.
Fidelity Europe Fund (FID 228) – Similar to the CIBC European Equity Fund, this offering can invest in companies of any size and looks for those that offer strong growth potential and high quality management teams. It tends to be fairly well diversified and will hold around 50 companies. The managers continue to avoid
investing in companies located in the current trouble spots of Greece, Spain and Portugal, with biggest holdings in the UK, Germany and France.
Unlike the first two funds we mentioned, this one employs a very active management style with high levels of portfolio turnover. Perhaps as a result, it is also the most volatile fund on our list. It is likely to provide the most upside in a market rally, but will also be hit the hardest when markets fall. Year to date, the fund has had a great run, gaining 16.9%, outpacing the MSCI Europe Index by 9.3%. This is a good pick for those with a higher risk tolerance
Bottom Line – While some aggressive and contrarian minded investors may want to consider investing in the region, caution is warranted. Yes, central bank activity has removed the biggest risks from the region, but markets have rallied higher, pushing up valuation levels. The economic picture still remains murky, but opportunities are there for those willing to take the risk. The picks discussed above, in our opinion, have the potential to provide better than average gains for investors looking for exposure to Europe. For more conservative investors looking for exposure to the region, you are most likely better off investing in a high quality global or international equity fund and let the portfolio manager make the call as to how much exposure to Europe is appropriate.