European Opportunities Trust (JEO) has been managed by Alexander Darwall since launch in 2000. Alexander focusses squarely on fundamentals, ignoring the short-term noise of the stock market, and invests based on his own analysis of each portfolio company, and taking a long-term view.
Alexander aims to build a low turnover portfolio of “special” companies that will outperform over the economic cycle. However, his portfolio construction aims to ensure that those companies in which he has highest conviction should contribute the most to JEO’s returns.
This process, as well as a high conviction approach to portfolio construction, has led him to outperform the benchmark over several stock market cycles (see Performance), in turn leading the trust to trade on a premium rating relative to peers over much of the last decade (see Discount).
2020 was a poor year for JEO. Since the market recovery phase after the pandemic, lower value-added, capital-intensive businesses significantly outperformed higher value-added, more capital-light businesses, which are the ones that JEO remains exposed to. That said, performance since the summer has improved considerably, with JEO largely making up its underperformance over 12 months.
The historic premium rating relative to peers gave way to a discount to peers after fraud at Wirecard was exposed (at the time, it was the largest position in JEO’s portfolio). Since then, JEO has traded on a wider discount than the peer group average. At the time of writing, JEO trades on a discount to NAV of 11.4%.
Having met up with Alexander recently, we believe that it is encouraging that he continues to stick to the investment process that has stood him in such good stead over the past 20 years of managing JEO. This is a highly active strategy, and as such JEO’s performance in any one year may be expected to differ quite markedly from the broader European equity market.
There are already potential signs that Alexander’s historic outperformance relative to peers is starting to return once more. Relative to the benchmark, JEO has only underperformed in three calendar years in the past two decades. 2021 is shaping up to be another year of outperformance. If the market once again starts to see Alexander’s underperformance of peers as the exception rather than the rule, we see the potential for a re-rating, as we discuss in Discount.
The board have stated their objective of maintaining the discount in single digits and, with Alexander also having bought shares for his own account during 2020, as well as regular buybacks now underway, further downside in the rating looks limited to us. Alexander’s portfolio of global leaders with growth prospects that he believes are independent of regional economic cycles means JEO looks attractive compared to Global trusts trading on an average discount of only 0.3%. Alexander appears confident in the long-term prospects for his companies, and so a double-digit discount may prove an opportune moment for long-term investors.
|Strong long-term track record from a high-conviction, stock-picking manager
||Highly active portfolio can mean that at times, performance can lag the wider market
|Pragmatic mandate enables manager to look for best European companies operating on a global scale
||Short-term performance has been challenging, both in absolute and relative terms
|Potential for a re-rating should historic outperformance of peers revert
||Devon Equity Management is a young company