European Opportunities 04 March 2021

European Opportunities Trust (JEO) has been managed by Alexander Darwall since launch in 2000, applying the same consistent approach to stock picking. Alexander believes that his focus on ‘all-weather’ businesses stands the trust in good stead in these uncertain times.

In the recent interim results, Alexander identified several new challenges. However, he believes that when the era of ‘endless free money’ ends and interest rates start to rise, his portfolio of ‘special’, lowly levered global companies with strong pricing power will serve to re-establish JEO’s record of outperformance.

Alexander’s focus on fundamentals, ignoring the noise in markets and taking a long-term view means this is a pure stock-picking Portfolio. He runs the portfolio in a concentrated manner. Despite being more concentrated, NAV volatility is not out of line with peers. We attribute this to portfolio construction, with Alexander identifying different investment drivers behind each holding.

The six months to 30 November were poor in both absolute and relative terms. The Wirecard fraud was a significant detractor. However, other non-COVID-19 issues have hit other holdings and, more latterly, lack of exposure to many of the reflationary and cyclical stocks have hindered relative performance. JEO has only underperformed its benchmark in three of the nineteen financial years since launch.

On a current Discount of 9.9%, JEO is the only trust in the AIC Europe sector with a negative Z-score, suggesting that its discount is wide relative to the position a year ago. In fact, the discount is wide relative to its long-term history too – having last traded on this level of discount for any stretch of time back in 2009/2010.

As the interims illustrate, the six months to 30 November 2020 was not plain sailing for JEO. That said, it is managed in a high-conviction and concentrated manner, so we would not expect performance to necessarily echo the wider market.

As we discuss in Portfolio, Alexander observes that recent challenging performance, Wirecard aside, is more a reflection of short-term market sentiment rather than based on fundamentals. He is confident that his businesses are in a position to deliver strong outperformance over the long term, whatever the economic environment.

Whilst 2020 was hard for JEO, we believe it is more relevant to look at longer-term track records. Alexander has run JEO since 2000, over which time he has only underperformed the benchmark in three financial years.

The discount has widened to c. 10% since the Wirecard fraud was revealed. Subsequent performance has, we think, contributed to it remaining wide. However, the board have stated their objective of maintaining the discount in single digits and, with Alexander also having bought shares for his own account, as well as regular buybacks now underway, further downside in the rating terms looks limited to us.

With Alexander confident on the long-term prospects for his companies, it could be time to look through the ‘noise’ of short-term performance and recognise that a double-digit discount may prove an opportune moment in for long-term investors to enter.