Fidelity European Trust 07 January 2021

Fidelity European Trust (FEV), formerly Fidelity European Values, offers investors a portfolio of large-cap European equities chosen for both capital and income growth. FEV has been run by lead portfolio manager Sam Morse since 2011, who has recently been joined by co-portfolio manager Marcel Stötzel, though Sam retains the final say.

As we outline in the Portfolio section, FEV follows a bottom-up approach to asset allocation and attempts to balance quality growth and valuation sensitivity, termed ‘growth at a reasonable price’. Sam looks for quality dividend-paying companies, as he believes long-term dividend growth is key to profitability, and he looks for four key characteristics. The resulting portfolio is intended to have a defensive tilt, one which can protect on the downside while still participating in a portion of the upside.

We believe FEV’s performance has been strong over recent years, with the trust outperforming both its peer group (the AIC Europe sector) and benchmark (the FTSE World Europe ex UK Index) over a five-year period. FEV generated an NAV return of 83.9% over this period, in excess of its peer group’s 76.1% and its benchmark’s 66%. We view much of this outperformance as a result of Sam’s growth bias and successful stock selection.

In our opinion one of the unique aspects of FEV is its use of derivatives rather than debt to gear the trust, as discussed in the Gearing section. The use of contracts for difference (CFDs) allows FEV to gear at potentially lower cost, while also taking short positions on the market (albeit small ones). FEV currently trades at a 4.3% discount, with this discount having narrowed over the last two years and narrower than the peer group’s average.

It is our view that FEV offers investors a measured but ultimately straightforward way to access the European equity market while taking advantage of a closed-ended structure. The ‘growth at a reasonable price’ mantra Sam follows has prevented any major deviations from the benchmark’s regional or sectoral allocation. As a result, FEV offers exposure to Europe without taking major active positions in any one region or sector.

The active management component of FEV, often taking the form of stock selection, has in our opinion been successful. FEV has been able to outperform its peers and benchmark without having to sacrifice its progressive dividend, with the trust having the highest dividend growth rate of its peers. However, we believe that Sam’s disciplined investment process – which biases FEV towards growth stocks – may work against him in the near term, as renewed economic activity and the eventual resolution of the pandemic could disproportionately favour value names.

We view the use of options to be a key differentiator for FEV. While Sam has been successful in his use of contracts for difference, we remain cautious as history has shown that short sellers will on average lose money. Thankfully such positions make up only a sliver of FEV’s portfolio. While FEV currently trades at a discount, we foresee potential tailwinds for the European equity sector which could see both FEV’s and its peer group’s discount narrow.