European Assets 29 October 2024

European Assets Trust (EAT) invests in European mid- and small-cap companies, emphasising high-quality companies with strong market positions. While the portfolio is mainly selected stock by stock, the manager is informed by wider themes, such as energy transition, digitisation and deglobalisation, which feed into stock decisions. In the Portfolio section we look at examples of companies benefitting from these trends.

Over the last five years EAT has delivered an NAV total return of c. 22%, compared to 53% for the Morningstar European smaller companies peer group and 40% for the index. We look at this underperformance in more detail in the Performance section, but is mainly explained by 2022, when the portfolio suffered the consequences of higher inflation and interest rates.

In May 2024 the board announced the appointment of Mine Tezgul as portfolio manager. Mine has been a manager at Colombia Threadneedle since 2019, and works with Philip Dicken, the new deputy, who has 20 years’ tenure at the company. These changes to the team were accompanied by changes to the management fee, resulting in a reduced OCF.

EAT pays quarterly Dividends, calculated as 6% of NAV at the end of the preceding year. The total for the year ending 31/12/2024 is 5.9p, which gives a 7.1% yield at the current share price, although the dividend rises and falls with the level of the NAV each year.

EAT has net gearing of 6%, introduced at the start of this year, with the team seeing the risk more on the upside for the portfolio. EAT’s Discount of c. 12% is in line with the peer group average but is the widest it has been for several years and with improved performance there is scope for it to narrow.

Mine believes that European smaller companies are at historically low valuations, absolutely and relative to large-caps, and this creates the opportunity for a strong recovery now that inflation and interest rates are falling. In the Performance section, we look at how underperformance in 2022 has impacted long-term performance. In fact the main underperformance occurred in a couple of months, with EAT’s portfolio being less well positioned for rising inflation and interest rates. EAT has, historically, traded at a narrow discount, reflecting better performance and the high dividend yield. More recently, the discount has widened, and the five-year performance figures are a likely cause. But this is arguably the opportunity, as with a larger, more integrated management team now settled in, the chances of EAT restoring its performance numbers have risen, and the discount could narrow back to historical levels.

EAT’s management was already well integrated into the Columbia Threadneedle European equity team by the time the lead manager was changed, so the portfolio did not see significant changes as a result, with the top ten holdings now settled, and a full portfolio review mostly completed.

With the outlook for small-caps improving, EAT’s dividend, which rises and falls with the NAV, could grow over the medium term. Combined with the wider-than-average discount, EAT has good recovery potential when sentiment improves towards European small-cap equities.