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6 Investment Ideas for Your Christmas Stocking

One stock, two passive funds and three actively-managed funds for investors looking at undervalued European equities

Holly Cook 24 December, 2012 | 6:00AM

An investment is for life, not just for Christmas. Over long time periods, shares have a tendency to outperform other asset classes, hence why conventional wisdom suggests those with long time horizons should look to place the majority of their portfolio in shares and only scale back their allocation as their horizon nears.

With this in mind, we've identified some investment ideas for those who believe share prices in Europe are undervalued. This is by no means an exhaustive list--use Morningstar's tools to find investments that suit your (or your loved ones') portfolio needs. 

On the 1st Day of Christmas...One Company's Shares

Rio Tinto (RIO) is currently the only LSE-listed stock under Morningstar coverage that carries a 5-star rating. This rating implies that our research team sees the stock as currently undervalued by the market.

Shares in the global diversified miner have gained 12% in 2012 but the share price remains down 35% compared to its pre-financial crisis valuation. 

Morningstar analyst Mark Taylor says Rio's world-class asset base and capable management makes it one of the few miners to earn more than its cost of capital through the commodity cycle.

Taylor recently cut his fiscal 2012 earnings-per-share estimate to $5.85 but he envisions EPS rising to $7.85 in fiscal 2013. His fair value estimate for Rio's LSE-listed shares currently sits at 5,500p. At the time of writing, Rio traded just under 3,500p.

On the 2nd Day of Christmas...Two Passive Investments

UK small-caps have been among the world's best performing equity categories in 2012, yet UK Small-Cap Equity open-ended funds failed to beat the FTSE Small Cap Index. It follows, therefore, that investors may well have been better off avoiding management fees and buying a UK Small-Cap ETF.

For those not put off by UK small-caps' strong run year-to-date, there's just one UK small-cap ETF to choose from on the LSE: the CS ETF (IE) on MSCI UK Small Cap (CUKS). This ETF's total expense ratio comes in at 0.58% but be warned that it's already rallied 24% in 2012 and past performance is not guarantee of future performance.

For those less into chasing performance and more interested in beaten-down European stocks, the iShares EURO STOXX Total Market Value Large (IE) ETF (IDJV) is the only LSE-listed ETF (traded in GBP) in any of Morningstar's European equity cateogries that carries a rating of just 1 star. This low Morningstar rating is because the fund has lost 9% on a 3-year annualised basis. Investors who believe Europe is where the value is in 2013 may be interested to note that the fund has a total expense ratio of 0.4%.

On the 3rd Day of Christmas...Three Actively-Managed Funds

Morningstar's Fund Screener generates just one Gold-rated fund in each of the three categories Europe Large-Cap Growth Equity, Europe Large-Cap Value Equity and Europe ex-UK Large-Cap Equity. A Morningstar OBSR Gold rating implies our analysts believe this fund is superior to its category peers: they think highly of the fund and expect it to outperform its peers and relevant index over a full market cycle of at least five years.

The three funds are:

Henderson European Growth (Morningstar Europe ex-UK Large-Cap Equity) - rated Gold. "Henderson European Growth features consistency of management and approach, which, in our opinion, make it one of the best offerings in its sector," says Morningstar OBSR's Muna Abu-Habsa. "Nevertheless, investors should be aware of the elevated risks...and potential swings in performance along the way."

Comgest Growth Europe (Morningstar Europe Large-Cap Growth Equity) - rated Gold. "In spite of predictable underperformance in the event of a sharp market rebound, the strategy has paid off over the long term," says Morningstar analyst Thomas Lancereau. "At the end of February 2012, the fund ranked comfortably within the top quartile over five years, with much lower volatility than its peers."

Franklin Mutual European (Morningstar Europe Large-Cap Value Growth) - rated Gold. "All told, this is an excellent choice for dedicated exposure to European firms," says Lancereau. "Our high regard for the management team, and their disciplined, proven investment process mean the fund easily retains the highest Morningstar Analyst Rating.

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About Author Holly Cook

Holly Cook  is Managing Editor of Morningstar.co.uk