BlackRock Greater Europe (BRGE) aims to generate capital growth from large, mid and small-cap companies listed in Europe. The managers have flexibility to invest all over the continent (ex UK) – including up to 25% in countries listed in developing Europe. This flexibility clearly differentiates it from its peers.
Despite having been managed by the same team since 2008, responsibility for BRGE was handed to Stefan Gries in June 2017, which has seen a marked change in the way portfolio is assembled. Stefan now clearly defines the investment philosophy, has a higher conviction portfolio, and lastly tries to deliver the best ideas of the European team more effectively, having changed the way that ideas get into the portfolio. Stefan has also committed to use gearing more fully in the future, when his optimism warrants it.
The portfolio of stocks has been reduced to 42 holdings, and the changes have resulted in strong relative performance - although not yet a meaningful narrowing of the discount. Stefan’s philosophy is clearly rooted in a desire to be an “investor” rather than a “trader”, and aims to own a company for a minimum of three to five years. He aims to find “giants in their niches”, have a good proportion of recurring business, high cash-flow conversion and have good growth optionality.
Compared to other funds and trusts, BRGE has a relatively high exposure to Morningstar’s “growth style”, and definite bias to mid and small-cap stocks. Stefan tries to balance risks by holding a proportion of the portfolio in more defensive stocks. Exposure to emerging Europe is decided purely on a bottom-up basis, and currently constitutes around 7% of the portfolio.
Since Stefan was given responsibility for the trust in June 2017, the trust has outperformed the benchmark and investment trust peer group by over 6%. Despite having a more concentrated portfolio than average, over the past three years BRGE has achieved its strong returns with amongst the lowest volatility compared to peers (source: Morningstar). Over the longer term, BRGE has outperformed the index in seven out of the ten full calendar years since the team took over management of the trust.
Gearing is used tactically by the managers up to a maximum of 15% of NAV. Stefan sees gearing as a natural extension of the number of opportunities that he is finding, and whilst gearing was approaching 10% during early summer Iast year, as valuations started to feel fuller, he started to bring gearing down again. This proved prescient, given the sharp falls stock markets experienced in Q4 2018. Currently, BRGE has negligible gearing employed.
The board has been successful at managing the trust’s discount volatility, and the shares have traded within a relatively narrow band. While it didn't choose to enact the May 2019 tender offer, it has been buying shares back in the market, most recently at a discount (we estimate) of around 4.3%. As such, BRGE currently stands on a discount of 3.8% - narrower than the peer group average
We believe the appointment of Stefan Gries has been a shot in the arm for BRGE. The effect of his changes has been felt in the strong performance since then, and over time this (as well as a more clearly articulated investment philosophy) should improve the market’s understanding of the trust. As has been seen with Jupiter European Opportunities, sustained premiums to NAV are not out of the question in this sector.
With a focus on “high quality” names, Stefan looks for companies that have “strong” management, good free cashflow and decent options to reinvest this cash for growth. The prospects for companies that Stefan owns – “giants in their own niches” – should mean they are insulated from any EU-induced political travails. Indeed, any sentiment induced weakness in share prices could be seen as an opportunity to buy a concentrated portfolio of high-quality growth companies such as BRGE.
With the board’s discount control having proved effective to date, it seems unlikely that there will be opportunities to buy at a significant discount in the future. Continued outperformance, if sustained, could well see the trust move to a premium rating.
|New, enthused manager who is clearly having a positive impact
||Growth focus could mean underperformance if “value” style starts to come back into favour
|Clear philosophy, and concentrated portfolio should enable manager to deliver alpha
||Discount to NAV is narrow relative to peers
|Amongst highest concentration portfolio, but amongst the lowest volatility – pointing to diversification benefits of investing across many different end markets as well as developing Europe