European prospects are looking up

The newsflow coming out of Germany just seems to get worse and worse. Over the last week alone, we’ve heard how unemployment has breached the five million barrier, while the latest economic forecasts suggest another year of miserable growth and depressed consumer spending. But don’t write off the world’s third largest economy, and by implication, most of “old Europe”. The sick man of Europe has, in the past 10 years, enjoyed productivity growth just as fast as America, and unit labour costs have fallen. Meanwhile, it has overtaken the US and Japan as the world’s biggest exporter.

And the optimists who believe that Britain has been through its own wirtschaftwunder (economic miracle) need look only at exports to China. We manage a couple of billion dollars in exports to the world’s fastest-growing market. Over the last five years, Germany has pushed up its exports from $5bn (£2.6bn) to more than $20bn. It also sits rather handily next door to most of the fast-growing accession countries in the EU. So is it old and sick, or young and dynamic?

And do you want to be invested in dollar assets at a time when that currency is probably in long-term decline, compared with the inevitable long-term ascent of the euro as central banks rebalance their reserve holdings? Yet finding British retail investors who are interested in putting money into Europe is like finding a British-built car that outperforms a German one.

Take the example of Premier European Growth. Its record speaks for itself – it is top-quartile over three months, six months, one year, two years, three years, four years and five years. With a record like that, you might imagine money is gushing into the fund. Yet it is all of £6m in size – and that’s 50% up on six months ago.

It is managed by the youthful James Buckley, who joined six months ago from Brown Shipley, where he was running the Solus European fund. Historically, Premier outsourced its fund management, and in the case of European Growth, the fund was being managed from Paris by BNP Paribas.

Perhaps Premier may at times have looked more like a rival to advisers than a partner, but now that it is bringing fund management on some funds in-house, it offers a much more interesting proposition. And in Buckley it now has someone who can not only manage the fund well, but also get out and sell it in a way that BNP Paribas was never going to do. He took over running the fund in September 2004, so it’s early days yet, but he has managed to keep the fund well ahead of the competition. Over the three months to February 2004, it was up 11% compared with the 7% rise in the FTSE Europe ex UK index.

Buckley doesn’t quite share my enthusiasm for Germany – he’s keener on Ireland and France – but he is passionate about the prospects for the sort of equity stories he can find in Europe, and the attractive valuations that can still be found. Recent equity studies have proven that the best markets over the very long run are not high-growth emerging markets, but those countries that create a safe environment for long-term steady growth. They won’t like to hear this on Wall Street, but European countries such as Sweden and Denmark have provided better long-term returns for investors than America.

Buckley is broadly replicating the approach he took at Solus: he runs a relatively focused portfolio of 40-50 holdings, but he is not an active trader. The approach is entirely bottom-up, with no significant country or sector constraints. The fund has a 40/40/20 split between large, mid and small-caps, but each active bet is not that large. His top 10 holdings make up 26% of the portfolio, and while tracking error is high, volatility is relatively low.

Buckley hails from Dublin, and Ireland is second after France in terms of country weightings. He holds CRH, Anglo Irish Bank (not to be confused with AIB), Ryanair and building materials group Grafton. Financials make up around a quarter of the fund, including Axa, UBS and Julius Baer, a Swiss private bank that enjoyed a 20% gain in January after a shareholder restructuring.

The property market in France and some other parts of Europe is beginning to take on all the characteristics of the British market a few years ago, and is currently going through possibly its biggest ever boom. Buckley’s portfolio has a number of housebuilders and infrastructure developers such as Vinci, although he has recently sold his holding in Swiss bathroom appliance group Geberit after a strong share price run.

The French live extraordinarily long lives. On average, a female child born in France today has a 50/50 chance of living to 100 years old. The country already has one of the world’s highest-quality healthcare systems, but now it needs to put in place an equivalent nursing home sector. Buckley sees this as one of the best long-term opportunities in Europe, and has invested heavily: “France has a huge number of small and medium-sized family-run companies with really good franchises. I own a number of nursing home and optician chains, which I expect will expand at a steady rate.” Among the stocks he has bought is Orpea, the leading provider of private nursing home facilities in France.

One drawback to the Premier fund is that the total expense ratio is high, at 2.2%, but this may decline as the fund expands. The same could be said for shares in Premier Asset Management itself. At one point, when the equity market was at its peak, shares in Premier were trading above £3.20. Now they are about 80p, but the operational gearing means that if money does flood into the funds, then you’d probably do better buying the stock rather than the fund.

Managing director Jonathan Fry says the company has slashed costs and can now run money at 0.4% and still make a profit, so any improvement in fund sales should flow pretty quickly to the bottom line. Premier has already nearly doubled from its low of 45p, but there’s an argument for saying it is still relatively cheap. Edward Bonham Carter’s Jupiter Undervalued Assets fund is one of Premier’s bigger stockholders, and you wouldn’t want to argue with that.

PATRICK COLLINSON
The Guardian Personal Finance Editor