European Opportunities 15 June 2022

European Opportunities Trust (EOT) owns a portfolio of companies selected by long term manager Alexander Darwall because of their “special” qualities. In Alexander’s view, these companies are differentiated and have unique products which makes them likely a leader not just in Europe, but globally.

The concentration of the portfolio, which sees the top ten holdings represent 68% of total assets (as at 31/05/2022), is indicative of just how different EOT really is. However, in several other ways it also differs from the benchmark and peers, including its exposure to UK listed companies which at the time of writing is around 21% of NAV. By contrast, peers have largely Europe ex-UK mandates. As we discuss in the Portfolio section, EOT is also differentiated because it is neither strongly invested in very high growth stocks nor in ‘value’. EOT’s exposure to ‘core’ at 61% is higher than any other trust in the peer group. This does not mean that the portfolio is not exposed to growth companies, but perhaps in a less extreme way than several peers.

Historically, EOT has also been differentiated by performance. As we discuss in the Performance section, since inception Alexander has delivered impressive NAV total returns of 11.0% per annum, vs. 5.6% for the MSCI Europe Index (to 31/05/2022). 2020 provided lots of challenges to investors of all types, but for EOT the negative effect of the Wirecard investment meant that the trust underperformed peers and the index by a wide margin. 2021 seemed to mark a return to form, but EOT’s performance so far this year has been behind the benchmark, although it is ahead of the peer group average.

EOT has historically tended to trade at a premium to peers, and occasionally a premium in absolute terms. EOT and the rest of the peer group has seen a setback in terms of discount (see the Discount section), and EOT now trades on a discount of 12.3%, a level which has only been exceeded on a sustained basis in the depths of the global financial crisis of 2008 and 2009.

In our view, EOT is amongst the purer expressions of active management in the entire investment trust universe. Alexander has applied the same philosophy and stock-picking process since he launched EOT in 2000, and focusses entirely on fundamental research and his team’s understanding of companies developed through manager meetings and 26 years of investing experience in this sphere.

In absolute terms, a discount of 12% for an investment trust is wide. In fact, there are few other trusts with non-specialist mandates and exposure to liquid equities that have a wider discount. Long term investors may therefore see this as an opportunity. Certainly, there are plenty of worries on the horizon for equity investors, but Alexander has always invested in companies that in his view should be able to deliver good long-term returns, irrespective of the economic environment.

Short term, Alexander’s confidence in portfolio companies’ strong balance sheets and earnings power explains EOT’s current level of gearing of 9.4% (as at 31/05/2022). This is higher than it has been in the recent past, and reflects both the fall in the market which will increase gearing all things being equal, but also Alexander investing more capital as valuations have come back. Whilst there may be volatile periods ahead, over the long term his track record shows that his active management has added value. When equity markets are back on a surer footing, one might hope the discount may settle at a narrower level.