Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock Greater Europe. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
- BRGE’s annual results for the year ending 31/08/2022 show a decline in NAV on a total return basis of 29.2% and a share price total return decline of 33.4%. This represents underperformance of the FTSE World Europe ex UK Index (the reference index), which fell by 11.5%.
- While BRGE has a strong long-term track record of outperformance, in the last financial year its portfolio suffered due to a write-down in Russian stocks after the invasion of Ukraine and a sell-off in long duration growth stocks, as well as a few stock specific issues.
- The year did see a strong recovery in the income account, with earnings per share rising from 4.13p to 7.65p. This supported a total dividend for the year of 6.6p per share, up 4.8% year-on-year. A final dividend of 4.85p per share has been proposed.
- BRGE’s strong long-term record means its discount has remained in single figures during the sell-off, in contrast to the peer group. 1.95m shares were issued when the shares traded at a premium at the start of the period, and 601k shares bought back once they fell to a discount, purchases being at an average discount of 5.5%. Buybacks have continued into the new financial year, with a further 699k shares repurchased up 03/11/2022.Given the relatively narrow discount, the board have decided not to implement a semi-annual tender offer. They note that over the six-month period to 31/08/2022, the average discount to NAV (cum income) was 4.5%.
- Chairman of the board Eric Sanderson said: “European equities continue to trade at a discount to global peers, providing attractive investment opportunities for our portfolio managers. The company’s portfolio is also weighted towards companies with well capitalised balance sheets and exceptional businesses that are able to adapt to the shifting market dynamics.”
Stefan Gries and Sam Vecht have a well-defined long-term investment strategy which has served BlackRock Greater Europe's (BRGE) shareholders well over the long term – in the five years to 31/08/2022 the trust has outperformed the reference index by 26% cumulatively (in NAV total returns). The sell off over the past year has to be seen in this context, and the managers remain committed to their approach. They highlight that operationally most of their long duration growth businesses have been performing well, and what has shifted is market sentiment and the valuation investors are willing to pay for growth.
The violence of the moves against growth stocks mirrors the violence seen in the bond markets, which reflects how quickly interest rates and interest rate expectations have changed, for multiple reasons. Looking forward, it is impossible to be sure that in the short term more violent moves are out of the question, although it does seem to us that much of the repricing in the light of changing interest rate expectations has likely occurred. If so, then it should be realized earnings and expected earnings growth which increasingly drives stock prices.
Whatever the immediate outlook, Stefan and Sam point out that the macro volatility has not changed structural trends which strongly support certain stocks and sectors: energy security and the need to decarbonise the global economy, the electrification of transportation, advances in health care and life sciences. BRGE’s portfolio is full of companies exposed to these long-term themes which the managers remain committed to. We note that turnover was just 20% during the year, in keeping with Stefan and Sam’s target holding period of three to five years.
In our view BRGE is a highly attractive way to gain long-term exposure to European-listed companies with strong growth prospects. There are clearly reasons to be wary in the short term, and the possibility more falls in markets cannot be dismissed, meaning that Stefan and Sam acknowledge it is prudent to take a measured approach to adding risk and the trust was not geared as of the time of the latest factsheet (in September). That said, the managers are looking for signs for a market bottoming over the next few quarters. They highlight that many of the best-in-class companies they own are trading at depressed valuations not seen in years, and we note BRGE’s own shares trade on a discount of 5.2% at the time of writing. After such a significant sell off we think the share price is looking increasingly attractive as a potential long-term entry point for those with a long-term view.
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