Eurozone carnage: Is investing in European funds now a bargain, or too toxic to touch?
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European funds have suffered brutal losses and huge outflows as the debt crisis rages on the continent.
Greece is on the brink of crashing out of the euro, Spain's banking system may collapse under the weight of bad loans, and the leaders of Germany and France are bitterly divided over how to stave off a financial catastrophe.
Unsurprisingly, investors continue to flee the scene of carnage. But we are always told you should buy when others are most fearful, so does that make this a buying opportunity in European stocks?
Euro clash: Greek firebrand leftist Alexis Tsipras is challenging German chancellor Angela Merkel's 'austerity' solution to the debt crisis
A 'no-go zone' for investors
Phillipa Gee: 'Foolhardy to invest in European funds now'
It's foolhardy to invest in European funds now.
That is the view of Philippa Gee, of Philippa Gee Wealth Management, who doesn't recommend any European funds at present.
'We don't know where the contagion will end. Unfortunately I don't feel it's over yet,' she says.
'I have some people saying to me I want to get into Europe because there might be an opportunity at this point. My view is that we are not at that point yet.
'I just think there is so much risk in the markets generally and most investments are relatively adverse at the moment. Why set yourself up for disaster?
'I am not writing it off permanently but I feel that it's foolhardy to invest in European funds now.'
Gee points out that we are in such uncharted territory that we don't even know what currency companies will be trading in on the other side of the crisis.
It's simply 'a no-go zone' right now, she believes.
Meanwhile, investors who bought into European funds when they were popular about 10 years ago need to consider carefully whether it is still worth hanging on and risking further losses.
'Further falls are entirely likely,' says Gee. 'Either get out and accept losses or have a long-term view.'
Although she declines to offer any European fund tips, Gee does suggest that opportunity seekers look at global growth funds.
These might have low European holdings at present but managers will raise them when the single currency crisis does start to subside.
'Don't think that you have to make these asset allocation decisions yourself,' says Gee. 'If you don't want to make that judgement yourself go for a global fund where a manager does it.'
Gee recommends: Jupiter Merlin Worldwide Portfolio . Total expense ratio - 2.56 per cent.
(TER is the benchmark of fund running costs which is the current best estimate for taking all the administration and dealing charges into account. The bigger it is, the costlier the fund is to run.)
LOW-COST ACCESS TO EUROPEAN INVESTING
Actively-managed funds need to pay a fund manager to select stocks, pushing up the costs. Index trackers, on the other hand, aim to follow a stock market's fortunes based on a computer programme.
It's far cheaper. The best trackers levy fees of less than 0.5% a year compared to, for example, the Jupiter Merlin fund that has a total expense ratio (TER) of more than 2.5%.
These effect of charges amplifies over the years and can leave a big dent in your final savings pot, although the managers argue that you are paying for their skill in outperforming the market. Unfortunately most of them don't and it's difficult to predict which ones will excel.
As for cheap trackers, £1.6billion of investors' money is currently parked in L&G's European tracker, but with an annual fee of 0.65% (total expense ratio of 0.84%), those savers would be wise to move to M&G's fund - 0.5% (0.69% TER) - or the even cheaper HSBC tracker at 0.25% (0.31% TER) or Vanguard's, also at 0.25%.
Investors could also consider exchange-traded funds (ETFs), which are more easily tradable and are sometimes cheaper than trackers.
DB X-trackers has a Euro Stoxx 50 ETF , which charges 0.1% and currently pays an income yield of nearly 4 per cent.
'Eurobonds' could spark market rally
Mick Gilligan: 'Valuations in Europe do look particularly low'
'In terms of where we are now valuations in Europe do look particularly low. That is not to say they can't go lower,' says Mick Gilligan, head of research at independent investment adviser Killik & Co.
Individual or 'retail' investors have sold off European equities, which has resulted in big flows out of open-ended funds, while investment trusts are trading at discounts of around 11 per cent, he explains.
Gilligan says the eurozone crisis is the dominant factor in any form of global investing right now. But the prospect of economic contraction in euro member countries means the companies most exposed to them are bearing the brunt of the sell-off.
'People don't want to hold anything in this space,' he says.
That goes for large cap and small cap firms - there has been selling across the board.
Nevertheless, Gilligan believes a eurozone scenario where the single currency countries 'muddle through' with the help of a guarantee on European banks is growing more likely.
He reckons 'eurobonds' - a French-backed idea which would see joint eurozone bonds issued to ease borrowing costs for weaker member countries - are unlikely to materialise.
'If we get eurobonds markets will take off big time, I think. But the other scenario is Germany stalls and says they are not willing to underwrite other countries.'
Right now, his preference in European funds is for those taking short positions [anticipating share falls] as well as long positions [anticipating share rises] in European companies. He tips Ennismore European Smaller Companies in this space.
He also likes Schroder European Alpha Plus, which has holdings in Swiss - in other words, not eurozone-based - companies such as Nestle, Novartis and Syngenta. The fund tends to be invested in firms with quite a bit of exposure to markets outside the eurozone, says Gilligan.
Gilligan recommends: Ennismore European Smaller Companies (TER 2.35 per cent) and Schroder European Alpha Plus (TER 1.67 per cent),
'There could be more blood'
Darius McDermott: 'There could be more blood'
European funds have mirrored the wider turmoil on the continent, says Darius McDermott of independent adviser Chelsea Financial Services.
He reels off one-year figures which reveal how European equity markets have underperformed other global markets.
The average North America fund is up 0.2 per cent while the average UK fund is off 6 per cent - but European funds are 19.1 per cent lower and European smaller company funds are down 15.7 per cent.
'More than anything markets hate uncertainty. The markets are very uncertain about which way Europe is going,' says McDermott.
That does makes Europe a bargain - the trouble is there's a definite possibility it will become even more of a bargain. That means, says McDermott: 'There could be more blood.'
And he adds: 'They say buy when fear is at its greatest. Fear is high but not at its greatest.'
He says if someone wants to invest £10,000 in European equities now, he would advise them to 'drip in not pile in'.
McDermott recommends: BlackRock Continental Europe (TER 1.67 per cent) and Argonaut European Alpha (TER 1.78 per cent),
European fund performance over five years (Source: FE data)
