Seeking income & growth in EuropeContributor Ian Cowie
With less than 18 months to go before the United Kingdom is due to leave the European Union (EU) in March, 2019, investors should consider how international diversification may diminish the risks inherent in stock markets. Brexit might prove a great success and many pooled funds will continue to focus on the UK but this does not have to be an either/or choice for individual investors, some of whom could benefit from opportunities overseas.
Rather than having all your eggs in one basket it might make sense to consider some professionally-managed asset allocation across 28 countries currently in the EU and other sovereign states in Continental Europe. While the outcome of Brexit for good or ill remains uncertain, JP Morgan offers a range of tried-and-tested investment trusts within the UK and across the broader European region which can enable investors to retain exposure to the biggest economic trading bloc in the world. The EU is home to more than 500m consumers whose average gross domestic product (GDP) is Euro 25,000 per annum1.
For example, JPMorgan European Investment Trust plc - Growth Shares delivered total returns to shareholders of 30% last year and 132% over the last five years to August 31, 2017 (2). JPMorgan European Investment Trust plc - Income Shares delivered even higher returns of 36% over the last year and 159% over the last five (2). So, whatever your views on Brexit, it may be worth considering European opportunities in addition to funds that will continue to focus on Britain – such as JPMorgan Mid Cap Investment Trust plc which invests in the more domestically focused medium-sized companies that make up the FTSE 250, delivering returns to shareholders of 19.04% over the last year and 196% over the last five years.2
How to make the most of Brexit
Nobody can be sure how Brexit will unfold and some potential outcomes could be beneficial for the UK economy and investors in it. For example, the UK Brexit Secretary David Davis has said he hopes to agree a “seamless” trade deal with the EU which he said will be “an outcome which is in everyone’s interests”3.
Most British individual investors will continue to have their earnings and expenditure denominated in sterling and so it makes sense to retain investment exposure to the UK economy. A wide range of tried-and-tested pooled funds are focused on the UK, such as The Mercantile Investment Trust which seeks capital growth from a portfolio of UK medium and small company stocks. Mercantile has delivered total returns to shareholders of 23% over the last year and 131% over the last five years (2). However, investors who do not wish to keep all their eggs one basket may decide it makes sense to hope for the best from Brexit while preparing for other potential outcomes.
Business as usual: Going for growth
Whatever else happens, Continental Europe is likely to remain home to many companies which are global leaders in their industrial sectors. Investment trusts make it convenient and cost-effective for individual investors to obtain exposure to opportunities overseas without needing to worry about different dealing costs, languages or taxes.
For example, JPMorgan European Investment Trust plc - Growth Shares’ underlying holdings include the world's biggest food company, the Swiss giant Nestle and the French pharmaceutical group Sanofi. While many aspects of the future remain uncertain, it is likely that people will always want to eat and, require healthcare. After more than 20 years managing this investment trust, Stephen Macklow-Smith has extensive experience seeking growth opportunities in Continental Europe4.
Investing for income internationally
Income-seeking investors often rely on funds and shares based in the UK, with its tradition of high dividend distributions. But this ‘home bias’ may inadvertently increase risk, now that just 10 of the hundred shares in the British blue chip index are forecast to produce 58% of the dividends paid by FTSE 100 companies this year5.
Dividends can be cut or cancelled without notice and so it may make sense for income-seekers to diversify internationally and broaden the base from which they hope to obtain yields. For example, JPMorgan European Investment Trust plc - Income Shares’ underlying holdings include the Spanish financial services group, Banco Santander; German chemicals giant, BASF and French pharmaceuticals group, Sanofi.
Seeking big gains from smaller companies
Investors whose priority is capital growth and are willing to accept higher risks in pursuit of potentially higher returns could consider JPMorgan European Smaller Companies Trust plc (2), where the fund manager, Francesco Conte, has been at the helm for 27 years.
This fund delivered total returns to shareholders of 31% last year and 225% over the last five. However, anyone considering investment in smaller companies should remember that not every acorn turns into an oak. As mentioned at outset, diversification can diminish the risk
Investing before, during and after Brexit
Britain’s vote to leave the EU has increased uncertainty at a macro-economic or ‘big picture’ level but investment trusts focused at home and overseas continue to provide tried-tested ways to diminish the risks inherent in stock markets by reducing individual investors' exposure to the danger of disappointment in any one company or country.
However Brexit unfolds, Continental Europe is likely to continue to be one of the largest trading areas in the world and home to companies that lead several industrial sectors. Investors do not need to regard Britain or Continental Europe as an either/or choice; it is possible to combine both in an internationally-diversified portfolio. So it may make sense to hope for the best from Brexit while preparing for other potential outcomes.
Investors should remember that share prices can fall without warning and that you may get back less than you invest. However, investment trusts seek to diminish the risk inherent in stock markets by diversification and professional fund management. There are hundreds of investment trusts to choose from. For more details see the Association of Investment Companies.
Quarterly rolling 12 months returns to Shareholders for the past 5 years (%):
- JPMorgan European Investment Trust plc - Growth Shares - July 2012/June 2013: 32.1; July 2013/June 2014: 27.4 July 2014/June 2015: 6.5, July 2015/June 2016 -3.0
- JPMorgan European Investment Trust plc - Income Shares - July 2012/June 2013: 28.6; July 2013/June 2014: 36.4, July 2014/June 2015: 7.2, July 2015/June 2016 -5.0
- JPMorgan Mid Cap Investment Trust plc - July 2012/June 2013: 61.2; July 2013/June 2014: 23.2, July 2014/June 2015: 24, July 2015/June 2016 -3.3
- The Mercantile Investment Trust- July 2012/June 2013: 34.9; July 2013/June 2014: 20.4, July 2014/June 2015: 18.1, July 2015/June 2016 -9.3
- JPMorgan European Smaller Companies Trust plc - July 2012/June 2013: 37.8; July 2013/June 2014: 39.1, July 2014/June 2015: 7.8, July 2015/June 2016 10.5
1Source: European Commission as at 02 October 2014
2Source: J.P. Morgan as at 03 October 2017. Total return to the investor, on a last traded price to last traded price basis, assuming that all dividends received were reinvested, without transaction costs, into the shares of the Company at the time the shares were quoted ex-dividend.
3Source: BBC as at 1 September 2017
4Source: Trustnet as at 03 October 2017
5Source: AJ Bell as at 12 September 2017
Diversification does not guarantee investment returns and does not eliminate the risk of loss. The companies/securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities. Past performance is not necessarily a reliable indicator of current and future performance. Investment trusts may borrow to finance further investment (gearing). The use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust's assets will result in a magnified fall or rise, in the same direction, of the investment trust's NAV per share.
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