European Assets 24 April 2023
Disclaimer
This is a non-independent marketing communication commissioned by Columbia Threadneedle Investments. 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 Assets Trust (LON:EAT) provides investors with exposure to mid and small-cap European equities, with an emphasis on high-quality businesses which are leaders in their relevant niches and have defensible businesses, or ‘wide moats’. Although EAT is primarily a stock-picking fund, the team have identified several themes relating to deglobalisation and energy security which, they believe, will be future drivers of performance.
The trust is managed by Sam Cosh and Lucy Morris. Sam joined the team managing EAT in 2010 and became lead manager the following year. Lucy has worked with Sam for 1 2 years. They manage a number of European mid and small-cap mandates, including the European portfolio of EAT’s stablemate, the Global Smaller Companies Trust (GSCT).
EAT pays a dividend using a mixture of current year revenue and distributable reserves. The dividend is equivalent to six percent of the net asset value at the close of each financial year, and is paid out in equal quarterly instalments over the following year. As we discuss in the Dividend section, EAT’s use of capital reserves predates its wider adoption across the investment trust sector and it provides something of a case study as to how a growth strategy can be married to a high distribution policy. Based on dividends already declared for 2023, EAT’s historical yield is 6.3%.
We think that Sam and Lucy’s long-term focus on quality businesses, using the Warren Buffet principles, could stand them in good stead, as or when stock markets become more nuanced about what types of growth they are prepared to pay for. Initially, rising interest rates are never a welcome experience for an equity investor, but investors who have struggled to understand high valuations for unprofitable companies may find that EAT’s investment style is appealing.
According to Sam and Lucy, European equities’ valuations have only been as cheap, relative to global equities, twice before during the last 20 years. Within that, small caps relative to large caps, are at a similar point. Effectively then, small caps are at a double discount versus global equities. We think this makes this a potentially very interesting entry point. Added to that, history shows that smaller companies tend to perform well at the end of recessions and interest rate cycles.
EAT is a case study of a team sticking to their investment process through a period of external headwinds. To keep the analogy going, the wind direction changed in late 2022, and it may be that the next years will provide more of a tailwind to the quality and growth mix that characterises the team’s investment style. Historically, EAT has traded for long periods at a premium to net asset value, indicating that it has a very supportive share register. If all the above factors come together, then the current discount of c. 9% could close to net asset value.
Bull
- European smaller companies at a large valuation discount
- Investment style headwinds may be turning into tailwinds
- Quarterly dividends
Bear
- Risk aversion may take time to abate
- Dividend policy is not progressive
- Small caps can be more volatile than large caps
Fund History
