Invesco Perpetual: the case for European Equity Income

Mark Dampier | Mon 19 October 2015

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When I began my career in financial services 32 years ago, Europe was not an obvious area to invest. In fact, if my memory serves me correctly, there was only one European fund available to investors. At the time, European stock markets were not seen as particularly shareholder friendly and it certainly was not an area in which to seek an income.

How things have changed. Fast forward to today and there are now 120 funds in the IA Europe ex UK sector (including higher-risk smaller company funds). The region has also embraced more shareholder-friendly practices such as paying dividends.

Many investors still view Europe with suspicion. Issues surrounding the single currency, along with the Greek debt saga, have caused many to be wary. In my view, the sooner European governments recognise that Greek debt will never be fully repaid and stop trying to sweep the problem under the carpet, the better.

Yet despite these issues, Europe has not been a bad place to invest over the past three years. Since the depths of the Eurozone crisis four years ago, the European market has risen 54%*. Patient investors, who are prepared to invest when sentiment is at its lowest, usually prosper in the long run, although there are of course no guarantees and past performance should not be seen as a guide to future returns.

Invesco Perpetual European Equity Income

Invesco Perpetual launched their European Equity Income Fund in 2007. Stephanie Butcher, the present manager, took over its management in late 2010. Over her tenure, the fund has gained 59.1%* against the sector average of 39.2%, although this should not be seen as a guide to the fund's future performance.

Past performance is not a guide to future returns. Source: Lipper IM* to 01/10/2015.

After a period of strong performance for European markets, does this mean investors have missed the boat? Stephanie Butcher doesn't think so. While Europe still has some way to go, she believes the continent remains firmly on the path to recovery. Quantitative easing is supporting the price of financial assets, while a low oil price is also acting as a tax break for many corporations and consumers.

Prior to the financial crisis, company earnings in Europe were broadly on par with those in the US. Earnings fell sharply in 2008, but while firms in the US recovered faster and have since surpassed their pre-crisis level, the earnings of European companies remain 35% below their 2007 peak. Stephanie Butcher expects European company earnings to start picking up going forwards, although earnings in some areas, such as Spanish construction, are unlikely to get back to previous levels.

As an income manager, she is often steered towards over-sold sectors as this is often where the highest yields are found. For example, she has held a significant weighting in financial companies since 2012 - an area once written off by most investors. The fund has since reaped the rewards as earnings in the sector are beginning to improve, aided by more stable growth and falling loan costs.

She sees similar potential in the oil & gas sector. While it is further behind on the road to rehabilitation, she expects earnings to improve as the impact of new management teams and a focus on cost control takes hold.

Conversely, she has little invested in pharmaceutical or consumer goods companies. In her other European portfolios, she had a high exposure to healthcare companies in 2009 when she felt the sector was undervalued. Investors were fearful over patent expiries; however, she felt cash flows were becoming more sustainable as company management increased their focus on shareholder returns. Her view proved correct and the sector has risen strongly over the past five years. She now feels the sector looks overvalued and as such has cut her exposure.

Investors should note this is a concentrated fund of around 50 holdings, meaning each stock can have a significant impact on performance. The manager also has the flexibility to use derivatives. Both approaches add risk to the portfolio.

Our view on this fund

The fund is currently positioned to benefit from an improving European domestic economy and I would therefore expect the fund to perform well if Europe, particularly southern areas, remains on the path to recovery.

With interest rates across Europe and the UK unlikely to rise in the near future, the fund's variable yield of 3.2% looks attractive and Stephanie Butcher expects this to rise over the coming year, although this is not guaranteed. As such, this fund could provide diversification to a portfolio focused on UK equity income funds.

The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors. We view the fund as an attractive option for a European equity income portfolio; however, within the European sector as a whole, we currently have greater conviction in other managers.

Read the key investor information document for the Invesco Perpetual European Equity Income Fund.