TR European Growth 30 September 2019
Disclaimer
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
The focus for the team at TR European Growth Trust is to deliver capital growth by investing in smaller and medium-sized companies in Europe (excluding the UK).
At the helm of the portfolio is Ollie Beckett, who uses a bottom-up approach to stock selection, splitting companies based on their stage of the life cycle. Depending on the stage, the manager looks at different attributes, valuation metrics and sell signals to understand if a company is intrinsically undervalued. This unique method not only helps the manager to decipher between different opportunities, but also to diversify the fund’s risk exposure.
2018 was a difficult year for the trust, and the correction in Q4 saw the trust lose 19.9%. However, the trust has rallied strongly in 2019 and has delivered NAV total returns of 15.7% year to date. In comparison the EMIX benchmark has returned 14.4%, while the IA and AIC peer groups have returned 14.1% and 16.3% respectively.
As might be expected in the current European climate, the discount for the trust is extremely wide relative to past history. 2018 saw the trust switch from a premium of 1% to a double-digit discount: at the time of writing the discount sits at 17%. The last time the trust was at this level was during the referendum in 2016.
TR European Growth looks interesting at the present time, with a discount of 17%, the widest it has been since the referendum. Certainly Brexit and the general political turmoil have weighed heavily on the share price. Furthermore, recessionary fears surrounding Germany recently have prompted concern among investors. If the largest EU member state continues to struggle, we could start to see the whole euro area weighed down because of Germany’s close economic relations with other countries. These factors have been even more damaging in the smaller companies space, where the investment proposition might be viewed as more risky.
That said, the story isn’t all doom and gloom. With the ECB’s recent decision to continue with QE, we could see a rally in European smaller companies as they continue to operate in a comfortable haze of steroid driven markets. TR European Growth would likely be one of the first trusts to benefit from this environment, and given the company’s strong long-term track record, the current discount could be viewed as an opportunity. It is easy to forget that in 2016 and 2017 the trust was the standout performer in the peer group, with returns of almost double those of its competitors.
bull | bear |
Wide discount | Manager's value-led approach remains out of favour |
Decent level of income that is covered by reserves | Still no clarity over Brexit |
Low charges |