Fidelity European Trust 07 May 2024

Fidelity European Trust (FEV) is a £1.5bn FTSE 250 investment trust providing investors with a core European equity strategy. FEV's managers have generated superior performance on a consistent basis over many years, and under Sam Morse's tenure, beginning at the start of 2011, the NAV total return is c. 305 %, compared to the benchmark's c. 164%. This has contributed to FEV winning a Kepler Growth Rating for 2024. As well as generating strong performance, FEV scores well in our analysis of factors such as risk and downside protection, which are shown in the Performance section. FEV has a relatively concentrated portfolio of stocks, in the range of 40–50, and the team is primarily concerned with stock picking over making sector bets, with historical analysis showing that the bulk of returns come from individual stocks.

While FEV is not an equity income trust, the team's strategy places value on companies that pay growing and sustainable dividends, which means that FEV does produce a dividend somewhat higher than the average for its peer group and has a current yield of 2.2%. FEV has increased its dividend every year for the last 13 years, which coincides with Sam's tenure as manager.

FEV is geared c. 13%. The team does not try to time markets or dynamically adjust gearing, and the trust will typically be geared in the range of 10–15%. This is based on an analysis of what the best gearing for the strategy would be over the long term.

FEV is currently trading at a discount of c. 4%, narrower than the Morningstar Europe peer group average of c. 9%. Historically, the FEV board has acted when the discount is wider than 10% and utilised its buyback powers, most recently in 2022.

As we discuss in the Discount section there are a number of factors we see contributing to FEV's relatively narrow discount, but probably the most fundamental of all is the trust's excellent performance record. Add in its size, which puts it on the radar for a broader range of investors, a responsive approach to managing the discount using share buybacks and a good dividend track record and it's not hard to see why the discount has proved quite resilient against a tough backdrop for investment trusts generally. While FEV's capital performance is impressive, the dividend growth achieved under Sam's tenure, over 350% , is a timely reminder that dividend growth can often come from trusts with lower initial starting yields. FEV is not an equity income trust, but the strategy places value on company dividends and this has paid off for FEV's investors over a period where CPI inflation has added up to about 50%.

In the Performance section we look at how investors have not yet reversed a trend that began in 2018 of pulling money from European equities, which in our view means that notwithstanding 2023’s good performance for the market generally and FEV specifically, there are probably many investors still underweight Europe. A shift in sentiment could see that change, which could be very positive for FEV’s performance and its discount. In our view FEV’s size, dividend growth, performance track record and core characteristics make for a compelling option for investors seeking to address their underweight position in European equities.