IN THE BACK
WHAT I BOUGHT LAST
BLACKROCK
CONTINENTAL
EUROPEAN INCOME
Jason Broomer, head of investment at Square Mile, explains why
he likes BlackRock Continental European Income’s focus on stable
businesses that produce high cash-flows
T
hroughout the post-credit crisis period,
yields across all asset classes have
markedly declined. This has come
about through a combination of explicit
policy intervention and the realisation that
investment growth rates will not match
those of earlier decades. Over the past seven
years it has been possible to find havens
of relatively secure high yields; many of
these could be located in the bond markets
in peripheral European sovereigns. As
valuations have shifted, the opportunities
for decent yields have diminished and the
recent introduction of quantitative easing
in Europe has more or less extinguished the
opportunity to find any yield at all from
sovereign-backed assets. Europeans have
long favoured bond markets but we think
that even the fabled “Belgian dentists” will
baulk at investments that guarantee losses.
Spaniards and Italians, long accustomed to
generous yields on national bonds, face an
unpleasant dilemma as to where to invest
next.
One asset class that may begin to receive
greater attention is high-dividend European
equities. The appetite for equities is not
strong in many regions of Europe and
a culture of dividend growth investing
has never really developed, but today the
alternatives are few. Traditional dividendpaying areas of the equity market such as
banks and utilities have not proved to be
reliable income stalwarts for European
investors, but stock exchanges list many
companies that have delivered decent and
growing dividends. It is still possible to
find steady companies with strong balance
sheets trading on free cash flow yields
of more than 5 per cent that make high
distributions to shareholders. Factor in a
modest growth expectation of 2 to 3 per
cent per annum and this is a very enticing
risk premium over negative cash and bond
yields.
We have recently added a position in
BlackRock Continental European Income
in the portfolios we run. The fund, which
generates a yield of close to 4 per cent,
invests in stable European equities that
produce high levels of free cash flows.
These may not be the most exciting of
businesses, and their growth projections
are modest, but they are reliable and
generate valuable dividends. The fund has
a low sensitivity to the overall market so
is likely to lag any sharp upward advance
and more importantly will be less exposed
to any down markets. We are happy to sit
on assets that should generate high singledigit returns, but if European investors
develop a stronger taste for assets such
as these, there is room for a material
revaluation. These assets represent one
of the few oases in the yield desert of
European financial markets.
Jason Broomer is head of investment at Square Mile