European Smaller Companies (ESCT)

European Smaller Companies (ESCT) has an impressive short- and long-term track record of capital growth from a diversified Portfolio of European smaller companies. With 100-120 holdings, ESCT limits single-stock risk, and manager Ollie Beckett and his team find opportunities across the business cycle from early-stage growth to mature compounders and turnaround situations. The breadth of stocks in Europe means that, even where thematic trends play a role, the individual companies behind it are often idiosyncratic or niche. Thus, ESCT is a great source of diversified returns and has built a strong long-term Performance track record, with an annualised NAV total return of 10.5% over the last ten years, compared to 9.7% for the benchmark index.

ESCT pays an enhanced Dividend, using a combination of revenue and capital. Set each year at 5% of NAV and paid quarterly, it leaves the managers free to focus on generating capital growth. ESCT has implemented a range of measures to protect against a persistent wide discount, including a three-yearly continuation vote, a performance-related tender offer every three years, and a buyback that targets a single-digit discount in normal market conditions. Smaller companies can be, of course, a volatile asset class from time to time, but these measures should help mitigate some of the extra volatility that can come from discounts, and the yield should make ESCT an option for income investors looking to diversify compared to more traditional equity income sources. ESCT’s current 10% Discount, in what are more challenging market conditions, may therefore represent an opportunity.

In 2025, ESCT undertook a large tender and a merger, and gearing fell while these transactions were in progress. Recently gearing has risen back to a more representative 13%, reflecting the management team’s view that the small-cap opportunity is attractive right now, with reasonable valuations and earnings growth picking up.