Personal Equity Plans: Our continental romance

THE SINGLE European currency has raised the profile of continental stock markets among UK investors. Users of Interactive Investor, an internet personal finance site, have ranked Jupiter's European fund as the most popular overall PEP fund, ahead of Virgin's index tracker PEP.

Europe's popularity is hardly surprising. Continental stock markets have performed well recently. Investment analysts believe that Europe is coming of age. Share ownership in countries such as France and Germany is becoming more popular as investors and pension funds have started to buy equities instead of bonds.

"The culture of equities is taking off in Europe so private investors are putting more money into the market," says Roger Guy, principal senior investment manager at fund managers Gartmore. "Institutional investors in Europe have tended to favour bonds, but they are switching to equities."

Privatisations and the restructuring of industries such as banking and telecommunications should create more competition, more profitable companies and higher returns.

Then there is the impact of the euro itself. The single currency makes economic and monetary union a reality for firms within the euro zone. Faced with a market with a population comparable to the United States, the scope for economies of scale are considerable.

"The onset of the euro has created one of the world's biggest trading blocs," explains Chris Rice, fund manager at HSBC Investments. "For any global investor, Europe is an incredibly important asset class that cannot be ignored."

Growth is the main reason to consider European investments. Dividends from continental companies are low by comparison with the UK or North America. Fund managers expect growth to continue as European companies undergo restructuring and as more companies, both private and state owned, have market listings.

"The introduction of the euro changes the growth structure," Mr Rice says.

For UK investors continental funds also offer an insurance against a downturn in the London markets. Continental Europe is at a different stage in its economic cycle. Holding European funds is a useful hedge against any fall in the value of the pound - and most economists expect sterling to depreciate against the euro in the next few years.

Putting money into continental Europe makes sense for investors who already have a range of holdings in either shares or UK-based PEPs. In the past, advisers rated European funds as relatively high risk because of currency factors. The euro means that investors are only exposed to one set of currency fluctuations: between sterling and the single currency.

In practical terms buying continental funds through a PEP is little different from buying a UK-only unit trust. It is increasingly difficult to avoid exposure to the rest of Europe: most large companies quoted on the London Stock Exchange have significant interests in it.

There is enough choice of European funds to let investors choose what level of risk they want to take on. The vast majority of them are actively managed, but trackers are becoming more popular. Last year just under half of all actively managed continental European funds beat their index. (Less than a third of UK active funds outpaced the market.)

Legal and General's European Index Trust aims to track the performance of the FT/Standard and Poor's World Index Europe, excluding the UK. The fund invests most heavily in Germany and France. As a tracker fund it has no initial charge. Some managed European funds have an initial charge as high as 6 per cent.

Market shocks can hit Europe hard. The recent crisis in Brazil has had a depressing effect on Portuguese and Spanish shares, for example, and nobody can be certain whether the euro will be a long-term success. "Europe is a ride with quite a lot of jolts along the way," says IFA Tim Coxon, from the Millfield Partnership.

"But as part of a balanced portfolio, Europe is an option you should not miss."

Contacts: Legal & General, 0500 116622.

IFAs and discount brokers can offer you details of the full range of continental funds.