Fund Spotlight: new chapter for fund offering growth and 4% yield

In our most recent Fund Spotlight article, we explored the opportunities available for income investors in the UK market. Today, we turn to the Continent which, despite being home to an abundance of successful companies with global influence and revenue exposure, has in recent years been overlooked by investors favouring global growth strategies.

European equity income funds invest in companies with the aim of not only generating long-term capital growth but also income from dividends paid out. Income funds may differ in their approach to generating dividends. One option is to target already high-yielding dividend shares, while another focuses on dividend growers – companies with lower yields initially, but that have the potential to increase dividends over time.

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The BlackRock Continental European Income fund aims to blend the two approaches. Management aim to balance income and growth in the portfolio, with 60% typically invested in above-average dividend yields and the rest invested in dividend growers. The strategy currently has a distribution yield of 3.9%, according to fund data firm Morningstar, and pays four distributions a year.

The fund’s objective is to provide an above-average income return from its equity investments, compared to the income produced by European equity markets (excluding the UK) as represented by FTSE World Europe Ex UK Index, without sacrificing capital growth over a five-year time horizon.

The fund has been co-managed by Andreas Zoellinger and Brian Hall since 2021 who are supported by the wider, well-resourced European equity team at BlackRock. In a recent update it was announced that Stuart Brown has joined as a co-manager in advance of the forthcoming retirement of Zoellinger at the end of the year. Zoellinger’s responsibilities will gradually transition to rest of the team over the coming six months. Brown brings with him 11 years of investment experience at abrdn and he has run European income portfolios since 2021. It appears the transition is being managed in the right way, with a sufficient period ahead to hand over responsibilities and no meaningful changes are expected across the funds’ process, philosophy or approach.

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The fund mainly invests in larger, well-established European businesses and management seek to invest in quality companies with sustainable and growing dividends. Quality is defined as businesses that have strong corporate governance, a strong competitive position, and financial discipline as well as earnings stability.

What does the fund invest in?

Central to the investment process of the fund is bottom-up fundamental company analysis, with a strong awareness of macroeconomic trends. The mandate is flexible regarding company size and country exposure, and the managers move away from the benchmark when necessary to better protect total returns and ensure superior yield. The result Is a concentrated large-cap portfolio of European equities currently of 40 holdings with position sizes ranging from 1% to 5%.

Sector exposures in this high-conviction portfolio can be dynamic. For example, the fund's exposure to the financial sector has ranged from 9% to 30% over time. The managers' conservative approach can lead to swift changes when they perceive heightened risk to companies' dividend policies. For instance, they cut half the fund's bank exposure during the banking crisis in early 2023. While banks later regained a more prominent role in the portfolio, the managers consider these to be more short-term opportunities instead of long-term convictions.

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More recently, the team has gradually steered the portfolio towards industrial names, preferring the less cyclical companies in this sector. Meanwhile, the managers have reduced the fund's exposure to traditionally defensive sectors such as healthcare and consumer defensive, taking their weight to a multi-year low. The fund generally avoids altogether the most volatile segments of the market, such as miners or automakers. Similarly, some of the traditionally high dividend-paying sectors, such as energy or tobacco, tend to be less favoured with better opportunities for dividend growers to be found elsewhere.

How has the fund performed?

The team at BlackRock have a strong long-term track record, achieving an annualised return figure of 8.8% over a 10-year period, which surpasses peers who returned 8.3% over the period. This is impressive given the strategy’s defensive characteristics, and the strategy has generally held up well when markets have fallen.

The fund’s quality bias and style-agnostic approach means that returns differ from most equity income peers, which tend to have a value bias. The managers' approach leads to a steadier return profile and to outperformance during periods of market weakness, with strong risk-adjusted returns when compared to both peers and the benchmark. This is evidenced in the fund’s relative outperformance during the period of market weakness in the first half of 2022.

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Over the past year, stock and sector selection have been driving performance. The funds two top contributing sectors have been financial services (3.6%) and Industrials (3.4%). At a stock level, the top contributors to performance have been Novo Nordisk A/S ADR (NYSE:NVO) (3.1%), the Danish multinational pharmaceutical company, and ASML Holding NV (EURONEXT:ASML) (1.6%), the Dutch producer of semiconductor equipment.

Morningstar Total Returns (GBP) to 31/07/2024. Past performance is not a guide to future performance.

Why do we recommend this fund?

The BlackRock Continental European Income fund has historically been led by a strong management duo, which is set to continue following the hire of experienced portfolio manager Stuart Brown. The wider analyst team at BlackRock provides a strong resource and is a clear strength for this strategy.

Having a blend of quality, income and growth stocks, the fund represents a well-balanced European equity income offering with defensive characteristics. It would blend well with a growth-orientated option for those seeking more diversified market and style exposures.

The fund's style-agnostic approach to income investing has achieved a smoother and less volatile return profile compared to peers. The fund is currently yielding 3.9% and has historically beaten the yield of the benchmark by 50%.

With an ongoing annual charge of 0.91%, which is one of the lowest among peers, this fund stands out as a high-quality European equity income option on ii’s Super 60 list of investment ideas.

 Please find the latest factsheet here.