Investing in Europe with investment trusts

How closed-ended funds can help you invest in Europe….

 
Europe is one of the wealthiest regions in the world, with a combined GDP that surpasses both China and the US.

The continent also boasts plenty of world-leading companies and is the largest exporter of manufactured goods and services globally.

For investors, that means there are a diverse range of opportunities. That could include big name German companies like Volkswagen and Siemens, French cosmetics giant L’Oréal, or smaller firms, like Czech cybersecurity firm Avast.

Given the companies on offer, it’s unsurprising that lots of people and companies look to invest in European businesses. Some choose to do this by buying individual stocks, whereas others do so by putting their money into investment trusts.
 

European investment trusts

 
Investment trusts are a type of investment fund that can be found in the UK and other parts of the world. They are set up as companies and have their shares listed on an exchange. To gain exposure to them, investors just have to buy their shares which are traded on the stock market just like other equities.

Some investors prefer doing this to buying shares in European stocks themselves for several reasons.

One is practical – it’s often hard and expensive to buy shares in European companies. For instance, many UK investment platforms don’t offer access to Polish or Czech stocks, even though both countries usually feature in indices or active portfolios covering Europe.

Other countries may be available but platforms can charge higher dealing fees than they normally would or impose large minimum trade sizes.

European stocks may also be trickier to perform due diligence on than their US or UK counterparts. For example, companies may not always release English-language reports. Alternatively, understanding the market they operate in may be difficult without some form of localized knowledge. Handing this process over to professional investors is a simpler option than going it alone.

Finally, an investment trust is an easy way of gaining access to a diverse portfolio without having to do the legwork yourself. Managing a large portfolio of stocks means doing lots of research and executing trades yourself. Aside from being hard to do profitably, this is also a very time-consuming process and some investors find it easier to hand the task over to investment trust managers.
 

Investment trust benefits

 
Investment trusts also have structural benefits that make them an attractive option to some investors.

Firstly, because investment trusts are set up as companies and have shares listed on an exchange, it is very straightforward to get exposure to them. Like any other company, you can buy and sell shares in them during market hours. This makes them simple to get in and out of, unlike open-ended funds that have a smaller set of time slots in which investors can enter or exit them.

This set up also means investment trusts are arguably better able to produce higher returns than open-ended funds. This is because the buying and selling of an investment trust’s shares has no impact on its underlying portfolio.

In contrast, when investors take money out of an open-ended fund, that money has to be returned by the fund to the investor. To perform that transaction, the fund must keep a large amount of cash in reserve, so that it can meet any potential demands from investors to get their money out, or resort to selling holdings to fund these withdrawals. This often leads to a drag in performance as the cash the fund holds doesn’t produce strong returns.

Investment trusts don’t have this problem and that means they’re able to invest a larger proportion of the cash they hold, boosting returns if they make the right choices. On top of this, trusts can also use gearing – borrowed money – to enhance returns, something open-ended funds can’t do.

For European investment trusts, the result of this dynamic has been a decade of outperformance compared to their open-ended counterparts. In the ten years up to 31/05/2022, investment trusts focused on Europe averaged total share price returns of 236.9% (Source: FE Analytics). An equivalent group of open-ended funds only averaged total returns of 176.9% (Source: FE Analytics).
 

What does investing in Europe look like?

 
Europe has lots of different types of companies. That could mean investing in a relatively small business that serves a domestic economy. Alternatively, it might mean buying into some of the largest companies in the world, whose revenues mainly come from outside of the continent.

For example, Baltic Classifieds is a smaller company that, at the time of writing, only serves customers in the three Baltic states. Conversely, the carmaker Volvo made about 60% of its revenues outside of Europe in its last financial year.

The key point here is that investing in a European company doesn’t necessarily mean investing in a European economy, so it’s not just a case of buying shares in a given country’s businesses to try and take advantage of its economic growth.

It’s also worth keeping in mind that Europe is not the same as the European union. For instance, Swiss companies are often found in European portfolios but aren’t in the political bloc.
 

The European investment trust sector

 
There are currently 12 investment trusts listed on the London Stock Exchange that invest specifically in Europe. Eight of those invest in larger companies or in businesses of all sizes, whereas the remaining four are focused on smaller companies.

The average total share price return for the trusts focused on larger companies in the decade up to 31/05/2022 was 236.9%. For the four focused on smaller companies it was 338.4%.

Ongoing charges for all of the investment trusts averaged 0.89%. The range was reasonably wide though, with a low of 0.65% and a high of 1.19%.

Europe-focused investment trusts also differ in terms of the countries they invest in. For instance, it’s not uncommon for the UK to be excluded from some trust manager’s remit.

This is an area where investors may want to exercise some caution. If they invest in both a UK investment trust and another that focuses on Europe, there is the potential for overlap in the two portfolios if the latter does include UK stocks.

As with other investment trust sectors, European-focused trusts also have different goals which, in turn, influence their investment decisions. For instance, Fidelity European Trust (FEV) is skewed more towards value investing, with a focus on companies that can grow their dividend payouts. Baillie Gifford European Growth’s (BGEU) managers, in contrast, are much more concerned with capital growth than dividends.

Understanding these various objectives is vital, as failing to match your own risk appetite and investment needs with the trust’s could lead to a disappointing outcome.