European Opportunities 22 February 2019

Jupiter European Opportunities (JEO) typifies a fund run by an investor who takes a long-term view, and applies that view with high conviction. As a result of Alexander Darwall’s stockpicking, JEO has reigned supreme for the past decade in both consistency and the extent of its outperformance – even despite the recent falls in the share price of the trust’s largest holding Wirecard.

Since 2000, Alexander has invested JEO’s capital in the same manner – by owning what he sees as exceptional companies, expected to grow thanks to long-term structural trends largely uncorrelated to the wider economic environment / stock market cycles. He expects to hold these companies for the long term, and has demonstrated that he runs winners. His low turnover and high conviction approach mean that currently there are four holdings within the portfolio (currently accounting for 24% of NAV by value) which have been part of the portfolio for twelve years.

Alexander has a high degree of flexibility to manage the portfolio as he sees fit. That he runs winners means that the portfolio concentration is much greater than one would normally find, with the top ten holdings representing 78% of NAV at the last month end. Additionally, he has full latitude to invest outside of European-listed companies, the requirement only being that most companies held will undertake a substantial proportion of their business activities within Europe. Currently c. 26% of assets are invested in UK-listed companies. By the managers’ calculations less than half (45%) of the portfolio’s companies’ sales come from Europe.

The results of Alexander’s stock-picking and his high conviction approach can be seen unambiguously in the performance numbers. Despite recent travails with Wirecard - the trust’s largest holding as at 31^st January 2019 - on a total return basis, JEO remains amongst the best performers in the European peer group in NAV terms over one, three, five and ten years.

Since 2001 (the first full year of being manager) Alexander has only underperformed the benchmark (FTSE World Europe Ex-UK Index) in two years – 2008 and 2016. The compounding effect of Alexander’s outperformance has meant that the trust has delivered stellar results for shareholders. Over the last ten years (to 13^th February 2019) the trust has delivered NAV total returns of 543% against a benchmark return of 160%, and the Morningstar Europe investment trust peer group average return of 212%.

Relative to peers, according to Morningstar’s “style” analysis, JEO has the purest “growth” portfolio of the investment trust peer group. It is also the only trust which has any significant exposure to UK stocks, and whilst over the long run the NAV has similar volatility to that of its peers, over the past one and three years it has been the most volatile.

Gearing has over the long term averaged around 10%, according to the Morningstar. The manager tends to deploy gearing when he sees opportunities at a stock level. During the summer of 2018, gearing reached a relatively low level (by historic standards) of 3%. Following the sell-off from September 2018 into the year end, gearing was increased to its current level of c 6%.

JEO has consistently traded at a premium rating relative to the rest of the Europe investment trust peer group, and for much of the past year traded on a premium in absolute terms. The recent volatility in NAV – largely thanks to Wirecard - has meant that the discount has once again widened out to 5%.

Alexander is one of the most consistent high conviction and high alpha fund managers in the investment trust sphere. Performance has been outstanding in absolute terms, but comparisons with European peers aren’t necessarily fair, given the latitude he has to invest outside European stock markets.

He likes to run his winners and retain a very concentrated portfolio comprised of companies that have a number of opportunities for growth. The risks of the concentrated approach are all too evident, with Wirecard's travails having significantly affected short-term performance relative to the peer group and index. That said, we are unlikely to see him change his approach.

Long-term investors have done well to stick with Alexander through thick and thin. Over anything other than the very short term, JEO’s performance has been excellent. Those who share Alexander's belief that the Wirecard revelations will soon be put behind it might see the current pull back and discount widening as an opportunity. That said, if the allegations are found to hold water, Wirecard still remains a significant percentage of NAV.