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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.

Overview
EAT's high dividend and exposure to European small-caps make for a distinctive recovery play...
Overview

European Assets Trust (EAT) invests in European mid- and small-cap companies, typically favouring quality growth companies with strong market positions. The team managing EAT are primarily stock pickers, but have identified a number of wider themes, such as energy transition, digitalisation and deglobalisation, which help inform their stock picking decisions.

The trust is managed by Sam Cosh and Lucy Morris, who have both worked on EAT since 2011. In the last year, following the acquisition of BMO by Columbia Threadneedle, the two have been integrated into a larger European equities team, and have more direct and indirect resources available to them, including dedicated European small-cap analysts. They believe this has led to better idea generation and a number of new companies have been added to the portfolio.

EAT currently yields c. 6.8%. The trust pays dividends from a mixture of current-year revenue and capital reserves. The dividend is set at 6% of net asset value each year, and therefore rises and falls with the net asset value, in contrast to a traditional progressive dividend. Dividends for the year ending 31/12/2024 have already been declared, at a total of 5.9p.

EAT has net gearing of c. 7%, which has been recently introduced, as Sam and Lucy feel that it makes strategic sense to increase gearing when valuations and sentiment are at a low ebb. This follows several years with minimal gearing.

EAT trades on a discount of c. 7%, in line with its five-year average and narrower than its peer group average of c. 11%. In the Discount section we discuss how EAT's high yield may contribute towards its relatively narrow discount.

Analyst's View

2023 saw a classic pattern of performance for European equities, with investors grudgingly climbing the wall of worry on large-caps, helped by some outstanding individual stock performances, but this wasn't followed up with much new money into European equity funds generally, let alone to small-caps. As convenient as it would be, no one gets an alert on their phone about when the right moment to buy smaller companies has arrived, but we can say that historically this tends to follow the first stage of an improvement in the performance of large-caps, and is often correlated to inflation abating and accompanying interest rates stabilising.

EAT's very long-standing commitment to paying a dividend using capital means that it can be considered as a portfolio diversifier for income investors, who would otherwise be unable to access an asset class such as European smaller companies. In a world where we continue to worry about global supply-chain security, Sam and Lucy's focus on industrials and logistics enablers, as well as semiconductors and healthcare could be timely, and their recent decision to introduce gearing for the first time, as discussed in the Gearing section, may also prove a good moment strategically, if small-caps do recover.

Bull

  • European smaller companies at very low valuations with recovery potential
  • EAT has introduced moderate gearing in anticipation of positive returns
  • Dividend distribution policy gives income seekers access to a different asset class

Bear

  • Smaller companies can be more risky than larger companies
  • Performance is behind the benchmark over five years
  • Dividend depends on the NAV, and does not provide predictable income
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