European Opportunities 25 July 2020

European Opportunities Trust (JEO) has been managed by Alexander Darwall since launch in 2000. In late 2019, JEO followed Alexander to his new fund-management company – Devon Equity Management. The same bottom-up, fundamental investment strategy is applied as has always been. Alexander looks to identify companies that retain high-growth characteristics and profitability longer than the market expects and to hold them for the long term.

Another characteristic of JEO has meant that 2020 has been a standout year for all the wrong reasons. Alexander manages high-conviction, concentrated portfolios. Over the long term this has meant he has delivered strong returns relative to the benchmark and his peer group. However, during 2020 Wirecard (now sold, but until relatively recently JEO’s largest holding) has had a significant negative impact on recent performance.

As we discuss in the Portfolio section, Alexander’s lessons learnt include the recognition that the sizing of the position had clearly been too big given the complex nature of the business, but also that he had placed too much trust in the wrong people in his due-diligence process. Nevertheless, if Alexander had not followed his investment process so rigorously (by selling immediately when the facts as he knew them changed), the impact on performance would have been significantly worse.

Over the long term JEO typically employs gearing. However, as we show in Gearing, it was taken down to zero in May. This represented an overall market de-risking exercise, and indirectly helped mitigate the damage from Wirecard.

The discount has widened to c.10% since June and both the board of JEO and Alexander himself have recently bought in shares at these levels.

We believe the lessons learnt from the painful Wirecard episode should not obscure the strengths of a strategy which has delivered over the long term. Up until the start of 2020, JEO was far ahead of peers on an NAV total return basis over most time frames.

As we illustrate in the Performance section, Alexander’s stock selection for the rest of the portfolio has been strong over the short and medium term, which means that we believe that the mistakes made over a single stock do not mean that his long-term track record is in any way invalid.

JEO has been de-rated relative to peers which means that, for the first time since 2009, the trust stands on a slightly wider discount than the weighted average for its peer group. This discount has not gone unnoticed by Alexander (who recently invested c. £700k), with the trust’s board subsequently buying shares back for the first time since 2011.

Alexander has a long and consistent track record and he has a very meaningful personal stake in the trust himself. It is our view that Alexander’s investment process (which remains unchanged at Devon) should, over the medium to long term, deliver attractive returns – as it has so clearly done in the past. The discount to peers is therefore unwarranted, and with the board now making purchases of the trust’s own shares, we believe this could be an opportune moment in discount terms for long-term investors.