A sustainable growth portfolio for more uncertain times: European Opportunities
A sustainable growth portfolio for more uncertain times…by Alan Ray
European Opportunities Trust (EOT) has an outstanding long-term track record, producing 10.4% annualised NAV returns since its launch in 2000, compared to the MSCI Europe Index return of 5.4%. However, in 2020, performance was impacted by the corporate failure of Wirecard, EOT’s largest holding at the time. We have covered this event previously, but we have no doubt that this remains a factor in explaining the current wide discount.
Given manager Alexander Darwall’s large personal stake in EOT, and consequently his close alignment with shareholders, it seems uncontroversial to say that the team have taken this away and learned from it. In the meantime, Alexander and the team continue to implement and refine the long-term approach to investment that has characterised his long career managing EOT, first at Jupiter and now at Devon Equity Management, where EOT makes up c.60% of assets under management. EOT is the manager’s most important client and so, again, there is a strong alignment of interests.
Alexander Darwall believes that markets in 2022 have, to date, punished higher-rated growth stocks indiscriminately, regardless of their sustainability. Portfolio companies have recently reported positive results but have not been rewarded for this in share price-terms. Alexander believes that the market will move to a more discriminating phase, where those companies well-positioned to resist higher inflation and interest rates will be rewarded.
Ultimately, Alexander is worried that there will be an economic recession, but he is confident that portfolio companies are prepared for this. Portfolio companies have little exposure to consumer discretionary spending and, on average, have low gearing. Consequently, he believes that EOT’s defensive, sustainable growth companies will be rewarded with better performance than the market.
EOT is part of a relatively small club of growth-orientated equity investment trusts with a history of trading at a premium. Although there is a lasting impact on shareholder sentiment from the holding in Wirecard, which we covered previously, in our view there has been no significant change in the structure of the share register or EOT itself that accounts for the currently wide discount of c.12%.
With markets potentially entering a new, more discriminating phase for growth investing, EOT could potentially deliver strong performance and its discount could narrow as a result. In the meantime, the board is using its buyback powers to enhance net asset value for shareholders. EOT’s continuation vote, expected in November 2023, may also provide a catalyst for the discount to narrow, although we think it is very unlikely that continuation will not be approved.
In our view, EOT’s long track record is currently undervalued due to more recent performance issues and, perhaps, also because of low levels of investor interest in European equities. EOT is, though, really a play on global companies that just happen to be listed in Europe and which have defensive growth characteristics. These characteristics should stand it in good stead in more uncertain markets.
- Portfolio companies are reporting good results and the manager expects them to rerate after an indiscriminate derating of growth stocks
- Discount undervalues an impressive long-term track record
- Both Alexander, specifically, and Devon Equity Managers, more generally, have a strong stake in EOT’s success
- A concentrated portfolio can lead to greater stock-specific risk
- Although underlying revenues are global, the mix of UK and Continental European companies may not fit with some investors’ benchmarks
- The manager, Devon Equity Management, is a boutique with AUM of £1.7bn and there is relatively high key man-risk in the management team
Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by European Opportunities. 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