BlackRock Greater Europe 07 February 2023

BlackRock Greater Europe Investment Trust’s (LON:BRGE’s) team has stayed calm during what proved to be a very difficult year for equities, generally, and European equities, specifically. There were outflows of c. $100bn from European equity funds as the effect of rising interest rates, inflation and, of course, war in Europe, caused investors to reduce their exposure. During this period, BRGE’s portfolio companies generally continued to post good results and the team believe that, in time, the market will be more discriminating and reward BRGE’s Portfolio companies with better performance.

Investors may take comfort that BRGE’s track record of maintaining a narrow discount or premium has continued, even during these very difficult market conditions. After a period during which the board was able to issue shares to meet excess demand, in 2022 the price came under understandable pressure and share buybacks have helped limit the discount to an average of c. 4%, compared to the Morningstar IT Europe peer group average of c. 10%. The managers have also controlled risk by reducing gearing over the year. These actions have helped soften the blow of equity markets for investors. Equally, although BRGE has a relatively low yield of c. 1.2% , the board has maintained the long track record of a progressive Dividend, with 2022 earnings’ cover returning to pre-pandemic levels.

Although BRGE maintains a wide remit that allows investment into developing European markets, this part of the portfolio has reduced in size and recent changes to the management team, with Sam Vecht stepping away from his co-manager role, are an acknowledgement that this is likely to be a relatively small part of BRGE’s portfolio. This is, however, a relatively modest change, with the exposure five years ago of c. 9% now at around 4%.

2022 was a difficult year for equities as investors adjusted to a world of higher interest rates, inflation and dramatic changes to geopolitics, exacerbated by war in Europe. In our view, this is a significant transition for investors as a long period of cheap money and predictable pricing comes to a close. As investors start to digest the long-term implications, we would expect equity markets in 2023 to become more discriminating and therefore for portfolios of high-quality companies with real pricing power to potentially outperform. BRGE’s portfolio scores highly in quality analysis and is not, for example, highly exposed to pre-profitable technology companies in its technology overweight. In our view, in a recovery for European equities, quality companies will perform well and BRGE is ideally positioned for such a scenario.

For BRGE’s Discount to remain narrow, in what were very difficult market conditions, is a testament to the importance that the board places on its track record in this respect. New investors who see absolute discounts as the single measure of value may wish to note that BRGE is, however, good value compared to its long-term average and we would expect it to narrow and regain its premium rating in a recovery scenario. In the meantime, we believe that the board and manager are taking a sensible approach to risk and have eliminated Gearing.