How to profit from a 2015 European recovery

This past year, 2014, was a difficult one for Europe. According to estimates provided by The Economist, the euro area is likely to have grown just 0.8 per cent for the year. And the annual inflation rate is estimated to have been a worryingly low 0.5 per cent.

Meanwhile, European stock markets underperformed other major world markets in 2014. The MSCI Europe Index was down by about three per cent by late December. That compares to an eight per cent gain by the S&P 500 composite index in the United States.

But things may change in 2015. Growth should gradually pick up, if Mario Draghi, president of the European Central Bank gets his way. Mr. Draghi is intent upon boosting growth and inflation through a quantitative easing program that would see the ECB engage in full-scale sovereign bond-buying.

But the implementation of quantitative easing has been delayed by German opposition, which, many observers believe, has only made Europe’s economic situation worse. And that, they say, has only made quantitative easing all but inevitable.

Low oil prices and euro should help

Other factors that should help boost European growth in 2015 include low oil prices, which should make it easier for consumers to spend. And a lower euro, which is down nearly 10 per cent against the U.S. dollar over the past year, will support the continent’s export industries.

Bold European Central Bank action, low oil prices and a cheap euro, then, may support a European economic recovery in 2015. And that would bode well for European equities.

If you’re an aggressive investor with a long time horizon, and you accept the argument that 2015 may turn out to be a good year for Europe, then European equities are a strong buy now.

Our top pick for European investment in 2015 remains Trimark Europlus Fund (Fund codes: AIM1673 (FE), AIM1671 (DSC), and AIM1675 (LL)). It’s a defensive equity fund that invests in high-quality companies.

The fund’s mandate and approach

Trimark Europlus seeks strong capital growth over the long term by investing mainly in the equities of companies located in Europe, including Eastern European countries and the countries of the former Soviet Union. The fund may, from time to time, invest in companies located in other countries, generally in the Mediterranean region.

To achieve these objectives, Europlus’ portfolio management team applies a bottom-up fundamental investment approach to analyze the quality and value of individual companies to determine whether or not to invest in them. The management team looks for companies that are leaders in their respective markets with sustainable competitive advantages that are expected to grow over the long term, that have strong management, and that are believed to be undervalued in relation to their intrinsic value.

The fund’s record

This investment approach has produced consistent, above-average results over time. These past 10 years, Europlus’ compound annual growth rate is 5.3 per cent, which ranks in the second quartile of the European equity category. The average performance in the category is 4.3 per cent.

The fund has also outperformed its peers in the past one-, three- and five-periods.

On a year-by-year basis for the 10 years ended Dec. 31, 2013, Europlus performed in the top half of the category in seven years. The fund was a top-quartile performer in four years, a second-quartile performer in three years, and a fourth-quartile performer in three years.

Strong performance under current manager

Europlus has also performed well under its current manager, Michael Hatcher. Mr. Hatcher joined the fund in 2009. Since then, the fund’s annualized return these past five years is 11.8 per cent. The category average return for this period is 7.3 per cent.

Below-average volatility plus defensive appeal

The fund’s volatility has also been less than average for the category. Its volatility ranking is a moderate six out of 10.

Above-average results combined with below-average volatility are characteristics that have widespread appeal. But Europlus should also appeal to defensive investors. About two-thirds of the fund’s assets are invested in defensive sectors or cash. The fund’s sector breakdown is as follows: consumer staples, 34.3 per cent; health care, 14.9 per cent; cash, 14.8 per cent; industrials, 12.3 per cent; technology, 9.4 per cent; financials; 5.4 per cent; consumer discretionary, 5.1 per cent; and materials, 3.9 per cent.

To sum up, a track record of consistent, above-average results, lower-than-average volatility and a defensive portfolio are features that make Trimark Europlus an attractive holding for the long term. Trimark Europlus is a long-term buy, as part of a diversified portfolio, if you want growth from a regional fund and you can tolerate medium to high investment risk.

 

 

The MoneyLetter, MPL Communications Inc.
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