Portfolio yield suggests it is undervalued: Fidelity European Trust

FEV’s portfolio yield suggests it is undervalued…by Alan Ray

Overview

Fidelity European Trust (FEV) is the largest European equity investment trust, with net assets of over £2bn. It has a long track record of outperformance under co-managers Sam Morse and Marcel Stötzel’s tenure, which has established its credentials as a ‘core’ European equity trust. Although the team describe their approach as risk averse, the portfolio is highly active, with 40–50 positions, and the aversion to risk describes the team’s careful assessment of every holding’s downside as well as upside.

One of the most important metrics the team considers is a company’s ability to pay and grow its dividend, and this is a central part of the investment process. This does not mean that the team are chasing yield, and the portfolio will normally have a lower yield but faster average earnings growth than then market. The key is really what a sustainable dividend says about a company’s risk profile. With short-term performance over one year trailing the benchmark, FEV’s portfolio yield is, unusually, at parity to the benchmark, which suggests to the team that the portfolio is undervalued.

In September 2025 FEV completed a combination with Henderson European (HET). FEV’s investment and dividend policies remain unchanged under the same management team as previously. The transaction itself was cost neutral to FEV shareholders, with FEV’s manager Fidelity contributing to costs. Management fees were slightly reduced, and this will result in lower ongoing Charges. The transaction also included a revised approach to managing FEV’s discount, targeting a mid-single-digit discount in normal market conditions. FEV’s current discount is c. 5% .

Analyst’s View

Perhaps superficially it is counterintuitive that, given the emphasis on a company’s ability to pay a dividend, FEV’s portfolio yield is normally lower than the market. But the strategy is not about absolute levels of dividend, rather it is about what the ability to pay and grow a dividend says about a company’s strength.

The chart in the Portfolio section shows, since 2013, FEV’s valuation on a dividend yield basis relative to the market is usually 5–15% more expensive. Currently, however, FEV’s yield is close to an all-time high, and the premium to the market has narrowed. As we see in the Performance section, FEV’s short term performance over the last year or so has, in contrast to its outstanding long-term record, been significantly adrift of the benchmark. We explore some of the stock specific reasons for this in that section, but one of the main takeaways is that, as a result, the relative valuation of the portfolio is unusually attractive.

That’s an interesting data point for any investor but particularly one still wondering whether they may have ‘missed it’ following a strong showing from the index in 2025. Further, FEV reported growing underlying revenue growth in the first half of its financial year, indicating that its portfolio companies are still in aggregate growing their dividend. Thus, while FEV’s discount has narrowed to low single digits, there is a strong case to say that overall it offers investors a portfolio of companies at some of the lowest relative valuations seen in the last decade.

Bull

• A long track record of outperformance generated from a risk-averse investment strategy
• FEV’s portfolio yield is close to historic highs relative to the market, suggesting it is undervalued
• Although FEV is not an equity income strategy, it has an impressive dividend growth track record that outstrips inflation over many years

Bear

• In the short term FEV has underperformed in a rising market
• FEV’s gearing can amplify losses as well as gains
• Dividend yield is relatively low

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_{This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.}