European Opportunities Trust 17 January 2024
This is a non-independent marketing communication commissioned by Devon Equity Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
European Opportunities Trust (EOT) targets capital growth from a portfolio of European companies that the manager believes have special qualities. Unusually within its peer group, EOT invests on a pan-European basis, including the UK, which forms about one third of the portfolio.
Alexander Darwall has managed EOT since the inception of the strategy in January 1999 and has a significant personal holding. Devon Equity Management was founded in 2019 by Alexander and a number of key individuals from the previous management team, including co-manager Luca Emo, and the sole focus of Devon is European equities.
The investment team aim to identify companies that they believe have special, enduring qualities, often with international revenues, and several of EOT's largest holdings have been in the portfolio for many years. A lower management fee, detailed in the Charges section, was introduced in June 2023.
EOT has produced an NAV and share price total return of c. 38% and 32% respectively over the last five years, compared to figures of c. 63% and c. 57% for the Morningstar Europe peer group NAV total return and the benchmark respectively. Over ten years, EOT's NAV total return of 136% is in line with the peer group and ahead of the benchmark.
Since launch in 2000, EOT has produced an annualised NAV total return of 10.8% and an annualised price total return of 10.2%, which compares with an annualised total return from its benchmark, the MSCI Europe Index, of 5.8% over the same period.
EOT's discount has narrowed over the past year from c. 14% in December 2022 to its current c. 8% with the board undertaking significant buybacks and also introducing two 25% tender offers in the run-up to the AGM last November. The first tender offer will be held at the end of January 2024 and the second will be held in three years should the trust underperform its benchmark over the intervening period.
EOT is currently ungeared, versus an average c. 7% over the last five years. Gearing is used tactically and the team believe they currently have enough upside risk in the portfolio without the need for gearing, particularly taking into consideration the need to raise cash to meet the cost of the tender offer in January. The trust pays a small annual dividend and currently yields c. 0.4%.
European equities remained off the radar for many investors during 2023, but EOT rose by about 17% in NAV terms, and its share price total return was almost 23% during the same period. We often say that continuation votes such as the one held by EOT late in 2023 are a backstop, that form a basis for discussion between the board and shareholders, and that’s what happened here, with the result that the board has introduced two tender offers and increased the tempo on buybacks, which together have helped to raise the share price faster than the NAV.
That said, long-term investment is mostly about companies and valuations, and EOT's portfolio offers investors a unique pan-European exposure to some leading global businesses. EOT has owned Novo Nordisk for over twenty years, long before it was Europe's largest company by market cap, a testament to the manager's long-term approach. EOT's five-year performance track record is still affected by its previous holding in Wirecard, and to help understand the context you can read about that here. Clearly the performance issues stemming from this one stock was a factor in shareholder discussions leading to the continuation vote. However, looking forward, investors seeking a high conviction recovery play on Europe, and a recovery play on an investment trust specifically, could see this a good time to revisit EOT.
- Long-term track record overshadows shorter-term underperformance
- Risk is reduced by eliminating gearing
- Conditional tender offer in three years provides additional backstop to discount risk
- Sentiment and macro factors in Europe remain weak
- Conversely, some investors seeking a recovery in Europe may prefer a geared trust to increase their risk
- EOT pays a minimal dividend, which may not suit some investors