Fidelity European Values, Jupiter European Opportunities, Henderson Eurotrust and JPMorgan European Smaller Companies are trusts trading at a discount that investors wanting to make the most of European strong fundamentals could consider, according to Kepler Trust Intelligence’s William Sobczak.
Sobczak, an investment trust analyst at Kepler Trust Intelligence, said there is a discrepancy between the opportunities in Europe and the sentiment of investors.
Not only have European strategies seen constant outflows since May, said Sobczak, but trust discounts have also widened to unusual levels.
Source: Investment Association
Indeed, negative sentiment towards the region has seen most trusts trading at discounts wider than their 12-month average after the first three-quarters of the year.
Despite being out of favour, however, the analyst noted that most economic indicators point towards Europe being in an expansionary phase.
“If one looks at the Stoxx 600 index, the underlying fundamentals of companies remain stable if not strong and corporate profitability has been improving,” Sobczak said.
“During the third quarter, the estimated earnings growth rate for European stocks was 14.2 per cent with six of the 10 sectors in the index poised to see an improvement in earnings, relative to one year earlier.”
He added: “On the revenue side, of the 140 companies on the Stoxx 600 which have reported revenues, 51.4 per cent beat analyst expectations compared to 54 per cent for a typical quarter.
“Alongside strong underlying corporate results, GDP continues to rise, and we have continued to see strong unemployment and wage growth data.
“Other notable indicators include rising inflation, persistent low interest rates and all-time high productivity levels.”
However, despite the positive backdrop for the region, valuations of European companies have been increasingly getting cheaper, a reason Sobczak believes it can be a reasonable time for investors to increase exposure to the area and benefit from the wide discounts on some trusts.
Fidelity European Values
Trading at a 9.8 per cent discount to its net asset value (NAV) is Fidelity European Values, overseen by FE Alpha Manager Sam Morse since 2011.
Morse invests across all market caps, countries and sectors and uses a bottom-up approach to stockpicking.
The portfolio typically holds between 40 and 50 stocks although the top 10 holdings currently make up about 40 per cent of the total assets.
“Fidelity European Values has seen its discount flirt with double digits throughout 2018, despite a strong long-term track record,” noted Sobczak.
Indeed, the fund is top-quartile over three years and second-quartile over five.
Since Morse took the helm of Fidelity European Values it has delivered a 127.11 per cent total return compared with a gain of 119.20 per cent for the average investment trust in the IT Europe sector and a gain of 76.07 per cent for the FTSE World Europe ex UK index.
The trust is 11 per cent geared and has an ongoing charge of 0.93 per cent, data from the Association of Investment Companies (AIC) shows.
JPMorgan European Smaller Companies
The next strategy highlighted by the analyst is JPMorgan European Smaller Companies, which is currently trading at a 13.1 per cent discount to NAV.
The trust aims to provide capital growth from a diversified portfolio of smaller companies in developed Europe, excluding the UK.
“JP Morgan European Smaller Companies is managed through a high-conviction stockpicking approach, which has delivered impressive results over the 23 years that the fund manager, Francesco Conte, has been at the helm,” the Kepler analyst said.
“The trust is comfortably the largest in the AIC European Smaller Companies sector, with a market cap of close to £600m, giving its shares good liquidity.
“The manager has delivered greater levels of alpha than any of the peers in the AIC European Smaller Companies sectors over one, three and five years.”
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
While the IT European Smaller Companies sector and the benchmark EMIX Smaller European Companies index are up 65.77 per cent and 58.15 per cent respectively over five years, JPMorgan European Smaller Companies has delivered a 69.11 per cent total return.
The trust is 9 per cent geared and has an ongoing charge of 1.03 per cent, data from the AIC shows.
Jupiter European Opportunities
The next strategy for investors who want to benefit from European companies’ strong fundamentals should consider is FE Alpha Manager Alexander Darwall’s Jupiter European Opportunities.
Although the trust tends to trade on a premium, it is currently trading at a discount of 1.8 per cent to NAV.
“Darwall is one of the most consistent high conviction and high alpha managers out there,” said Sobczak. “Performance has been outstanding in absolute terms, and Darwall likes to invest in what he sees as exceptional companies, expected to grow irrespective of the wider economic environment or stock market cycles.”
Over five years, Jupiter European Opportunities has delivered a 79.07 per cent total return compared with a gain of 49.12 per cent for the average trust in the IT Europe sector and a gain of 40.65 per cent for the FTSE World Europe ex UK benchmark.
The trust is 5 per cent geared and has ongoing charges of 0.90 per cent, data from the AIC shows.
Henderson EuroTrust
The final closed-ended strategy highlighted by the Kepler analyst is Henderson EuroTrust, a £218m trust targeting superior total returns from a portfolio of high quality European names.
Although it has been run by Tim Stevenson for the last 24 years, James Ross will be taking over as a lead manager in early 2019 following Stevenson’s announcement of his retirement.
“Ross believes that the types of businesses that can be found in Europe are a significant differentiating positive factor,” said Sobczak.
“He believes that within Europe there is a wide diversity of high returning, mid-cap companies. These companies have been controlled by private families over generations, with a long-term view always in mind.”
This, he said, contrasts to other markets like the UK, which is made up of very large, mature companies that are covered by many analysts.
As the below chart shows, while the average trust in the IT Europe sector has delivered gains of 49.12 per cent over five years, Henderson Euro Trust is up by 49.73 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Data from the Association of Investment Companies shows the trust’s discount has been fluctuating greatly over the last three years and is now 7.8 per cent.
Henderson EuroTrust is not geared and has an ongoing charge of 0.84 per cent.