Fund Profile

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This is a non-independent marketing communication commissioned by BMO Global Asset Management. 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 has the return profile of a high-quality growth portfolio and the highest yield of any European trust…
Overview

European Assets Trust (EAT) offers investors a Portfolio of high-quality growth opportunities within Europe’s small- and mid-cap market, with the board utilising the investment trust structure to offer a high dividend. EAT is managed by lead manager Sam Cosh and co-manager Lucy Morris, who follow an entirely bottom-up process to stock selection, with their main focus being on the overall quality of a company (followed closely by its growth prospects). The team’s bias towards the quality factor may mean that EAT is well positioned to weather the current inflationary environment. The managers believe that their companies command strong pricing power thanks to dominant market positions which allow them to pass on any inflationary pressure and avoid impairment to their investment cases, despite their high valuations.

EAT has beaten both its peers and benchmark over the past 12 months, in contrast to its underperformance against peers during the growth-stock-driven markets of 2020. This is solely the result of the team’s effective stock selection rather than sector allocation, something which has been a long-term feature of the trust, and which we discuss in more detail in the Performance section.

One of EAT’s most unique characteristics continues to be its high Dividend, whereby 6% of its annual NAV is paid out as a dividend each year. This policy has made EAT the highest-yielding European equity trust in both the large- and small-cap peer groups. EAT currently trades on a 3.1% Discount, which is narrower than both its peer group’s simple average and its own five-year average discount.

Analyst's View

In our view EAT offers two distinct advantages. The first is the team’s overwhelming commitment to ensuring that their holdings represent some of Europe’s highest-quality small caps, albeit with a clear growth tilt. While this offers a number of benefits, we believe the most important advantage in the current economic environment is that this offers a practical long-term buffer against inflation because the team’s companies are unlikely to be financially impacted by rising prices, due to their resilient business models. The team’s focus on bottom-up analysis also lends itself to offering investors clear diversification benefits, with their idiosyncratic portfolio having led their long-term performance to be almost entirely driven by stock selection.

The second advantage EAT offers is its attractive dividend of 6% of NAV. We believe income investors are unlikely to find a trust like EAT, which can offer not only the diversification and capital growth opportunities of European trusts, but also a high level of income. This can amplify the diversification benefits that EAT offers to income investors.

We are also encouraged by EAT’s recent 12-month performance, where despite the market’s rotation out of more expensive stocks – a common occurrence during periods of rising inflation – EAT has been able to outperform its benchmark despite its relatively higher valuations. If we continue to see a difficult market for expensive growth opportunities, it may be an increasingly attractive proposition for investors who do not wish to hold the lower-quality, more cyclical end of the market, especially if the team continues to demonstrate strong stock-level performance.

bull bear
EAT’s portfolio of high-quality assets may be well placed to pass on inflationary pressures
Might not capitalise on a strong growth rally as well as some of its peers, due to valuation sensitivity
Offers income investors exposure to high-quality European small-cap growth stocks, without having to compromise on yield
The use of gearing, though modest, can still enhance losses on the downside
Historically stock-driven return profile can offer a strong source of diversification
Small-cap growth strategies may not be suitable for more cautious investors due to their higher risk profile
Continue to Portfolio

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