Who would invest in Europe at the moment? Much of southern Europe is in turmoil as governments struggle to persuade their citizens to accept austerity packages. Citizens in the north are complaining about having to foot the bill for bailing out the profligate south.

Investors and economists worry that, even if the profligates do manage to stick to the swingeing cuts promised, it will not be enough to get their economies back on track – and some even warn that the future of the euro itself is at stake. And politicians seem to be caught in the headlights, unable to even think of a strategy for getting themselves out of this mess, never mind how to put it into practice.

Small wonder, then, that the European market, as measured by the MSCI Europe index, is the worst-performing this year.

However, it would be wrong to get too despondent. As Barry Norris, manager of Argonaut European Alpha, points out, Europe is not all about the eurozone. While three of the four most risky countries in the world are in the eurozone – Ireland, Greece and Portugal share that honour with Venezuela – five of the least risky are also European – Germany, Switzerland, Sweden, Finland and the Netherlands.

‘Europe is often seen as homogenous but that is quite wrong. There is a wide range of investment opportunities, many in countries which are not in the euro. Switzerland, Norway, Sweden and Denmark account for a third of the investment universe [but are not in the euro] and they are all doing much better than the UK in terms of their growth and debt levels.’

Companies, too, are generally in good health, while the recent plunge in markets across the globe means that many are lowly rated and offer generous dividends. ‘The yields on blue chip continental stocks are among the best you can get anywhere in the world,’ says Michael Clark, manager of Fidelity European Dividend fund. He cites Roche, the Swiss pharmaceutical company on a yield of 5 per cent, insurer Munich Re on 7 per cent – and, he points out, it trades on a discount to its assets of around 20 per cent – or telecom groups France Telecom and KPN, on yields of 8-9 per cent. ‘These are not junk companies. Some will say [these yields] indicate dividends are under threat but I do not think they are.’

Some economists warn that Europe faces a double-dip recession – and even Germany, which has so far been very resilient, now shows signs of slowing – but Clark has focused on investing in companies which will not suffer in a low-growth environment.

David Dudding, manager of Threadneedle  European Select and Threadneedle European Smaller Companies funds, says he is ‘fairly concerned’ about the impact the eurozone crisis will have. ‘Politicians have been behind the curve for a while and the longer it takes to come up with a solution, the worse it will get.’

But he adds that European equities are cheap, both relative to their long-term average and to other markets, particularly emerging markets. ‘Why would you own Chinese consumer goods companies if they are trading on a multiple double that of, for example, Nestlé?’ he points out.

Louise Kernohan, an investment manager on the European equities team at Aberdeen Asset Management, says there is unlikely to be an easy solution to the European turmoil. ‘Any measures politicians can come up with in the short term will be just that: to alleviate the market’s immediate concerns. The adjustment process will be long term and difficult and markets are likely to be volatile.’
For Norris, the key thing is ‘can the crisis be managed, if not solved’. He adds: ‘It can be managed, but central banks will only act when things become very hairy so it could be volatile for some time.’

His solution is to invest outside the eurozone  – which accounts for 40 per cent of the fund – while the remainder is in areas such as Switzerland, Norway and Sweden. He is also seeking opportunities in areas such as gold mining and property in Switzerland.

Mini fund profiles

PSigma European Income

Charles Glasse, co-manager of the fund, is ’amazed’ by how many companies in Europe he can buy on multiples under 10 which, barring a disaster, is ‘good value’.
The fund does not pick the highest-yielding companies – meaning dividends are under threat – but aims for 1.1 times the market yield and above. Glasse looks for ‘long-term investment themes not predicated on future economic growth’.

Among his current favourites is a banking share, and one from Italy to boot – Intessa SanPaolo – which has been remarkably resilient in the current financial crisis, as well as companies such as Swedish Match, paying only a modest dividend but with an active share buy-back programme, helping its shares rise more than 75 per cent over two years.

Financials are the biggest single sector, accounting for just under a quarter of the fund – perhaps surprising given the level of concern about the health of Europe’s banks – including insurers and German exchange company Deutsche Re.

Although the fund has underperformed recently, its value bias means it should be well-positioned for a slower growth environment.

Total expense ratio is 2.53 per cent and the yield is 4.1 per cent.

Argonaut European Alpha

Barry Norris, who manages this fund, is keen to stress that much of Europe remains in robust health despite the ongoing crisis. In recognition of that, the eurozone accounts for about 40 per cent of this fund.

While Germany is the biggest country holding, accounting for more than a quarter of the fund,  Switzerland – which is particularly benefitting from the flight to quality among investors – and Norway come in next.

He points out that the recent stock market slump means that ratings are low and yields are high. ‘To us, the market is factoring in more than a tough patch, but probably a recession.’ He is still finding plenty of opportunities in areas such as pharmaceuticals, telecoms and oil. ‘We also like property in the right places.’

While Swiss bonds yield virtually nothing, property is available at a yield of 5 or 6 per cent. He is also interested in areas like gold mining, where the prices of the companies themselves have failed to keep up with the surge in the gold price, and reinsurance, where companies are ‘very cheap’.

The portfolio is concentrated – the average number of stocks is between 30 and 55 – and aims to achieve consistent high returns. The fund has been in the top quartile over one, three and five years.

Launched in 2005, the TER is 1.79 per cent.

Threadneedle European Smaller Companies

Around a fifth of the fund, managed by David Dudding, is in Germany with France and Switzerland the next biggest overweights. ‘If the rest of the world does well, so will Germany,’ he says. ‘It is the world’s biggest exporter and, although it is associated with Europe, the rest of the world is important too. It is in a good position to weather a storm.’

The fund has been in the first quartile over one, three, five and 10 years. Dudding has a team of over 20 researchers helping him identify opportunities from his universe of shares, all of which fall outside the 225 biggest companies in the region, and may be less familiar to European fund holders.

Among his current big bets are Dutch bulk-storage company Koninklijke Vopak and Swiss speciality chemicals group Sika.

Dudding says he has been taking a defensive position for some time, concentrating on companies well-positioned whatever the state of the economy. He has many industrial holdings because he thinks the austerity programmes across Europe will mean slowing domestic demand, so companies will have to rely on emerging markets for growth.

The fund’s TER is 1.69 per cent.