Resolution Argonaut European Income A Accumulation

Today, Europe compares favourably with the UK on many levels. The cash flows of many European companies are currently better than any other major region including the UK, US, Japan and Asia.

Europe is the undiscovered continent for income. There are currently three times more companies in Europe with yields in excess of 3.5% than the UK market so the opportunities are vast. Europe has never been more profitable and we believe valuations are amongst the most attractive they have been for 17 years. Earnings are strong and forecast to grow faster than the UK in 2008 (5.6% versus 4.2%, source: Resolution).

Currency has also been a key driver of returns (although please note it can work both ways). Since July 2007, the Euro has strengthened against sterling by 16%. This is not good news for holidaymakers travelling to the continent but if this trend continues it will be for sterling investors in European funds. A strong Euro can help boost both capital returns and dividends.

Our top pick in this area is the Resolution Argonaut European Income Fund, managed by Oliver Russ. It pursues a focused strategy of 30 to 55 holdings ensuring his best ideas are backed with the highest level of conviction, although this does make it more risky.

Three types of companies are sought for the fund – ‘value’ companies which have substantial cash flow and attractive valuations; ‘growth’ companies which require little or no capital to finance their growth, leaving earnings to be paid out as dividends; and ‘special situation’ companies who are restructuring or have the scope to pay significantly enhanced dividends. Obviously the success of the fund depends on the manager’s
ability to find such companies and potential investors should be aware that it can go down in value as well as up.

This fund provides a gateway for investors looking for equity income and wishing to diversify away from the UK market. Last year it paid a net yield of 4.9% which is superior to many UK income funds. Since launch the fund has grown by 34.5% compared to the European average of 31.3% (Source: Lipper, from 15/12/05 to 01/05/08). It has also performed better than any UK equity income fund over the same period. Bear in mind though that past performance is not a reliable guide to the future.

A study by Merrill Lynch shows that in times of slowing growth it is the high-yielding and dividend growth strategies that deliver the best returns. The case for equity income investing is therefore compelling and we believe this fund is the European deluxe of an investment in this sector.