Europe has been distinctly out of fashion among private investors in recent years. From its position as one of the most popular investment sectors during 1999, interest has rapidly tailed off to the point where, while some companies have attracted net inflows, the industry as a whole has suffered net redemptions for quite some time.Figures from the Investment Management Association show that in 2004, investors pulled more than £201m out of Europe. Of that, some £84m came from Isa investors. In many ways one can understand why the private investor has become so negative on Europe. With news on issues such as the failure of the stability pact, high unemployment, rigid labour markets, strikes and the strength of the euro constantly hitting the headlines, it is no wonder they believe Europe must be a poor place to make money. But the lack of appetite for Europe among professional investors is more surprising – particularly as it is quite clear that despite some economic rigidity, European markets have been among the best global performers of recent times. In 2004, for example, the FTSE World Europe ex UK index rose 12.9% in sterling terms, beating the 12.3% return from the FTSE All-Share, the 2.9% gain in the S&P 500 and the 2.4% achieved by the Nikkei 225. During this time the Jupiter European fund gained 16.8% bid-bid, net income reinvested, according to Standard & Poor’s. What the performance of European markets makes clear is that investors do not have to believe in the euro or the European Union to make good money from investing in the region. This becomes even more obvious when you look at the performance of some of the individual companies we invest in. Last year, for example, Neopost rose 42% in local currency terms, Novo-Nordisk rose 22.5% and Essilor International gained 33.7%. Of course Europe, like any region, has its poor companies. But what the excellent share price performance of these companies does prove is that ignoring Europe because of the weak economic backdrop is a mistake, as there are plenty of companies that are able to produce strong growth regardless. It also raises the fundamental question of whether making asset allocation decisions simply on the basis of the economic backdrop in a particular area is a valid strategy for the future. In my view taking a strictly regional approach to investment is increasingly out-of-date. The fundamental reason why companies in Europe – and anywhere else, for that matter – are able to transcend the problems in their national or regional economies is the application of technology. The implementation of technology has revolutionised trade for companies all around the world. Today even the smallest firms can, providing they have great products, reach overseas markets. But the implementation of technology is not the only reason why investors are missing out by avoiding Europe. There are great opportunities to make money from companies here in 2005 and beyond, for a number of reasons. Restructuring among companies based in Europe is now speeding up, even if governments are liberalising more slowly. The accession of the East European countries to the EU in May last year has proved a powerful catalyst behind the progress companies are making. There are two main effects on companies. First, managements have a stronger hand with their employees – the threat of moving operations to low-cost Eastern Europe is a powerful bargaining tool. Second, lower taxes in Eastern Europe have put pressure on the rest of Europe to follow suit. Germany, for example, has just announced plans to lower corporate tax rates. There are several examples in Germany of companies benefiting from this trend: Siemens, DaimlerChrysler and BMW have, for example, all concluded favourable labour deals. Another advantage for investors in Europe is that valuations tend to be lower than in America. One example of this is Neopost, a manufacturer and distributor of mailroom systems. This company is second in the market behind Pitney Bowes. Neopost’s projected growth rates for the coming three years are higher than those of Pitney Bowes and yet the valuation is lower. Europe can claim many companies that are clearly world leaders and, in many cases, are in areas to which British investors would otherwise find it hard to get exposure. Novozymes, the industrial enzymes company, is, for example, the undisputed world leader in its field. With increasing globalisation these companies are finding new and immature markets to tap. There is clearly real strength among businesses in Europe. But with 15 different European markets to choose from, it is extremely important that investors put their money into the right companies. There is no point simply buying the index, as that simply mixes up the region’s winners with those that are too reliant on the performance of their domestic economies. Instead it is necessary to be a good stockpicker and find those companies that are truly able to buck the economic trend.