Ian Cowie: will warmer relations boost investment trust laggard?

Five years after Britain left the European Union both parties agreed the outline of a new trade deal this week that they claim should be mutually beneficial. Prime Minister Sir Keir Starmer said this “win, win” agreement could eventually boost the British economy by £9 billion a year and Ursula von der Leyen, president of the European Commission, claimed it should open access to the EU’s €150 billion (£126 billion) rearmament fund.

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So, whether you are a Brexiter or a Remainer, it’s worth considering if some exposure to Continental Europe could deliver capital growth and income. Either way, investment trusts focused on the other side of the Channel can diminish risk by diversifying asset allocation away from the UK or the US to maximise returns.

Perhaps surprisingly, that has worked well over the past decade and five-year periods with more mixed performance over the past year. To be specific, the Association of Investment Companies (AIC) “Europe” and “European Smaller Companies” sectors produced average returns over the past decade of 127% and 149% respectively; both beating the AIC’s all investment trusts average of 111%.

Similarly, over the past five years, Europe and European Smaller Companies delivered 66% and 86% respectively; easily beating the all trusts average of 44%. Over the past year, the continental funds achieved 2.6% and 11%, respectively, compared to the all trusts average of 3.5%.

Never mind the generalities, who were the specific winners and losers? Montanaro European Smaller Companies Ord (LSE:MTE) is the standout continental success story, leading the smaller companies sector over the past decade and year with total returns of 250%, 62% and 19% over the usual three periods.

However, this relatively small fund, with total assets of £329 million, more or less ignores income, yielding less than 0.7%, albeit with dividends rising by an annual average of 4.6% over the past five years. As you might expect, none of the underlying holdings in continental corporate tiddlers is a household name in Britain, and yearly charges are on the high side at 1%. MTE shares trade at a modest -6.2% discount to net asset value (NAV).

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The European Smaller Companies Trust PLC (LSE:ESCT) managed to grab the top slot in this sector over five years, with total returns over the usual three periods of 205%, 137% and 7.3%. Its dividend yield of 2.4% increased strongly by an annual average of 11.8% over the past five years.

While it’s important to remember that dividends are not guaranteed and can be cut or cancelled without notice, if ESCT could sustain that rate of increase, it would double shareholders’ income in just over six years. Ongoing charges on this £867 million fund are also reasonable at 0.67%, with the shares priced -7.5% below their NAV.

Turning to trusts focused on bigger businesses on the Continent, JPMorgan European Growth & Income Ord (LSE:JEGI), with assets of £570 million, leads its sector over the past five years and one-year periods, with total returns of 160%, 139% and 15% respectively. Income-seekers will note its 4% yield increased by an eye-stretching annual average of 17%. If that rate of compounding could be sustained, it would double dividends in just over four years.

Here and now, JEGI lived up to its name, achieving growth and income from a portfolio led by the German business-to-business software company SAP SE (XETRA:SAP); the Dutch semiconductor chip machine-maker ASML Holding NV (EURONEXT:ASML) and the Swiss pharmaceutical giants Roche Holding AG (SIX:ROG) and Novartis AG Registered Shares (SIX:NOVN). Ongoing charges are 0.66% and JEGI shares are priced -4.8% below their NAV.

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Fidelity European Trust Ord (LSE:FEV), with assets of £1.9 billion, leads this sector over the past decade with total returns of 177%, 93% and 2.1%. The recent decline in relative performance may be linked to troubles suffered by the Danish weight-loss wonder-drug maker Novo Nordisk AS ADR (NYSE:NVO), which is FEV’s second-largest holding and which has been displaced by SAP as Europe’s most valuable company. ASML and Roche rank as FEV’s biggest and third-most valuable holdings, with its top 10 also featuring the Swiss coffee to mineral water and pet food conglomerate Nestle SA (SIX:NESN). Its ongoing charge is 0.76%, and discount is small -2%. I purchased FEV around two years ago.

At the other end of the performance scale, European Assets Ord (LSE:EAT) deserves a dishonourable mention. This £383 million fund suffered the humiliating hat-trick of slumping to the worst performance in its smaller companies sector over all three of the usual periods, with total returns of 45%, 32% and 2.3% respectively.

Rotten capital returns were the punishment for chasing too much income, with EAT yielding 6.4%, albeit with dividends shrinking by 0.5% per annum. Adding insult to injury, charges are on the high side at 1.01%. No wonder these shares are priced -12% below their NAV and look cheap for good reason. I bought European Assets nearly four years ago.  

On the plus side, EAT now has newish managers in the form of Philip Dicken and Mine Tezgul, both of whom were appointed last summer. Let’s hope Dicken and Tezgul can share the benefits of warmer relations between Britain and the EU with EAT’s long-suffering shareholders.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in European Assets Trust (EAT), Fidelity European (FEV), Nestlé (NESN) and Novo-Nordisk (NOVO) as part of a globally diversified portfolio of investment trusts and other shares.