‘People often ask themselves why the EU has failed to produce a single major tech giant on the scale of those to be found in America,’ claimed Boris Johnson this weekend.
Fund managers are for the most part still people, and if they are indeed pondering this issue it seems not to be deterring them from ever-closer union with Europe.
According to a September survey of global fund managers by Bank of America Merrill Lynch, professional investors are more bullish on Eurozone equities relative to historical averages than any other asset, region or sector. A net 54% of these managers are overweight Eurozone equities, 1.5 standard deviations above the long-term trend.
And despite the foreign secretary’s doubts, technology – alongside banks – is these global investors’ primary sector allocation within Eurozone equities. They have obviously identified more exciting European tech opportunities than Minitel, which Johnson genuinely described as the ‘French equivalent of Google’.
Indeed, European stock pickers have tended to perform well relative to the index. Over both the past one and three years, the average manager in Citywire’s European equity category has generated positive risk-adjusted returns, with information ratios of 0.18 and 0.24 respectively.
Going with the flow
Fund buyers have nevertheless fled the sector, which has suffered net redemptions of just over £7 billion through the past 12 months. European equity ETFs, meanwhile, have netted £26 billion over the past year, according to TrackInsight.
In part, this reflects an unusual abundance of choice. There are not only multiple country and sector-specific European ETFs; there is also competition among factor-based products for European exposure.
iShares, for instance, has London-listed ETFs for European value, momentum, quality, and size, plus a multi-factor European ETF. The single-factor ETFs have total expense ratios of 0.25%, while the multi-factor fund charges 0.45%. This range all includes UK stocks within its mandate, however.
The First Trust Eurozone AlphaDex ETF omits the UK, but does carry a higher fee burden at 0.65%. This too employs a multi-factor approach, constructing an index of 150 stocks based on their growth and value characteristics. The strategy has outperformed the broader European equity market over the past year, returning 22% to the 17% from Eurozone stocks generally.
Factor this in
A more fully diversified factor vehicle is the Source Goldman Sachs Equity Factor Index Europe ETF, which has a management fee of 0.55%. As well as value, momentum, quality, and size, this ETF adds low beta, although it too incorporates the UK. It has returned 17% over the past year, in line with the broader market.
For those seeking purely a lower-volatility approach to European equities, there are several options too. The Ossiam iStoxx Europe Minimum Variance ETF charges 0.65% and includes the UK, while the SPDR Euro Stoxx Low Volatility ETF excludes the UK and has a lower fee of 0.3%.
A much different low-beta skew is offered by the PowerShares Euro Stoxx High Dividend Low Volatility ETF, which has ongoing charges of 0.3% and the UK outside its purview. The high-dividend component takes this portfolio far more into financials than the SPDR ETF, with respective weightings to this sector of 21% and 8%. The SPDR fund instead has greater exposure to industrials and consumer names.
Looking for leverage?
Those keenest on European equities – with even Johnson admitting that ‘the Eurozone is growing more strongly now, and that is immensely positive’ – also have multiple leveraged ETFs at their disposal. Boost has a three-times leveraged European ETF, plus one so leveraged specifically for European banks, while Société Générale has a five-times leveraged Euro Stoxx product.
These providers equally have equivalent short ETFs for those who noted in the September fund-manager survey that the proportion of respondents who felt Europe had a favourable profit outlook dropped by six percentage points month on month, to a lowly net 19%.