European Assets Trust review

The European Assets Trust (EAT) targets capital growth through investment in quoted small and medium-sized European companies. Its benchmark is the EMIX European Smaller Companies ex UK Index.

The fund is managed by Sam Cosh and Lucy Morris, who believe smaller companies are often under-researched and so possibly also undervalued, with scope for potentially significant outperformance over time.

They follow a systematic, bottom-up, patient investment approach, which results in a relatively concentrated yet diversified portfolio typically of 40-50 holdings.

The trust was launched in 1972 as a Dutch company and, until March 2019, its shares were dual-listed on the Amsterdam and London stock exchanges. In March 2019, the board completed a migration of the fund to the UK. EAT now has a premium listing on the London Stock Exchange.

This move to the UK was motivated by many considerations, including the fact that a large majority of the trust’s shareholders are UK residents and that it would also create the potential – recently realised – to reduce ongoing charges.

Performance

The managers made some changes to the portfolio during the early days of the pandemic, which have had a favourable impact on performance. In recent months, performance has also been supported by the change in market drivers back to quality and growth.

In the six months to end August 2021, EAT returned 23.4% on a net asset value (NAV) basis and 30.4% in share price terms, compared with a return of 16.4% on the benchmark index.

The trust has also performed particularly strongly in absolute terms during the past year, outperforming the benchmark significantly over one year and more modestly during longer time frames.

In the half-year to end August 2021, EAT’s notable overweight to technology stocks was the biggest contributor to relative returns. Its semiconductor stocks performed especially strongly, supported by both the long-term trend towards digitalisation and interconnectivity and by the recovery in activity.

Nordic Semiconductor, the top contributor to returns, saw a fivefold increase in orders during the first half of 2021, and ASM International, a Dutch supplier of semiconductor production equipment, also performed well. Both announced good results and very positive projections of future development, as countries strive for self-sufficiency in chips. Alten, a French IT consultancy company, was also a key contributor to performance during the period.

The trust’s industrial sector exposure was the second-largest contributor to returns in the six months to end August, thanks in part to the performance of Interpump, an Italian machinery company; Coor, a commercial services business; and Fluidra, a Spanish swimming pool supplier that has benefited from a surge in demand for its pools and maintenance products.

Other recent strong performers include IMCD Group, a Dutch chemical producer and the trust’s new acquisition Sdiptech, an industrial consolidator.

The favourable impact of these and other smaller contributors to returns in the six months to August 2021 was only partially offset by poor performance from some of EAT’s other holdings.

The largest detractor was budget airline Wizz Air, followed by the German online fashion retailer Global Fashion Group. Exposure to Vidrala, a Spanish glass bottle manufacturer, and Fjordkraft, a Norwegian electricity supplier, also hurt performance.

Though the managers have since sold Fjordkraft, they retain their confidence in the long-term prospects of Just Eat, an online food delivery company that was another drag on performance.

Just Eat has a strong business in Germany and the Netherlands, despite the emergence of some competition, which has hurt the share price. It has also expanded into the UK and the US, using profits from its core business to fight competition in these markets.

Despite its recent disappointing performance, the managers have also maintained their exposure to FlatexDEGIRO, a German online broking platform, which is ranked among EAT’s top 10 holdings. Assisted by its effective platform, this company is providing a better service than traditional brokerage houses to a new generation of tech-savvy investors. It has bought its Dutch competitor, Degiro, and is winning market share. Results have been outstanding and the managers believe the company has positive long-term growth potential, but the stock was subject to some profit-taking during the summer months.

At the sectoral level, European Assets Trust’s significant underweight to real estate was the largest detractor, while healthcare was the second worst-performing sector, due largely to the fact the trust’s holdings, especially Gerresheimer AG, trailed sector gains.

European Assets Trust

Price	143.5p
Market capitalisation	£516.7m
NAV*	151.8p
Discount to NAV	5.4%
Yield	5.6%

*Including income. As at 10 September 2021.

Source: Sarah Godfrey and Mel Jenner, Edison.

The managers’ view – ‘Hold steady and let our winners run’

EAT’s managers Sam Cosh and Lucy Morris took full advantage of the sharp equity market sell-off triggered by the pandemic. In the first half of 2020 they added a selection of top-quality names to the portfolio at attractive prices.

“Everything we were waiting for was suddenly cheaper,” says Cosh. These changes have paid off, and the trust’s performance has improved markedly during the past year.

Looking ahead, Cosh and Morris expect the debate on the outlook for economic activity, inflation and interest rates to continue in the second half of 2021, and they see market leadership continuing to swing between growth and value styles accordingly.

Nevertheless, they believe EAT’s portfolio is now well-positioned to deliver a good performance regardless of whether growth or cyclical stocks are in favour with investors.

Most of the portfolio’s holdings are high-conviction technology and other quality, long-term growth businesses, such as semiconductor companies Nordic Semiconductor and ASM International and IT infrastructure supplier Cancom.

However, these holdings are augmented and balanced by other kinds of businesses. Some, such as Wizz Air, a budget airline, food companies Marr and Sligo, and Coor, a Swedish commercial services company, are what the managers believe to be “great businesses” that are yet to recover from the pandemic but with positive long-term growth prospects.

Others are high-quality cyclical holdings that are already benefiting from the normalisation of economic activity, such as Sdiptech AB, a Swedish industrial consolidator; Fluidra, a Spanish swimming pool supplier; Dometic, a Swedish electronics company; and NORMA Group SE, an industrial components manufacturer.

The portfolio also includes companies that will profit if interest rates rise. Holdings in this category include Storebrand, a Norwegian financial services business, Ringkjoebing Landbobank and SpareBank.

With performance improving and positioning well balanced to cope with any style swings and associated fluctuations in market leadership, Cosh and Morris are now satisfied with the portfolio’s composition.

In Cosh’s view, “it is now time to hold steady and let our winners run”, so they do not intend to make further significant changes to EAT’s holdings. “It’s back to business as usual,” says Morris, which, for her and Cosh means they intend to maintain their efforts to find good businesses at sensible valuations.

They believe this is the best way to keep delivering attractive returns to shareholders – not just for now but, more importantly, over the long term.

Investment strategy – High-quality companies but at the right price

There are approximately 4,000 quoted European small and mid-cap companies, a large and diversified universe where companies are not always well-researched, understood and appreciated.

This leads to market inefficiencies, which managers Sam Cosh and Lucy Morris seek to exploit in order to deliver superior long-term investment performance. More specifically, they seek high-quality smaller companies.

An assessment of the strength of a company’s competitive advantages, or ‘moats’, is also essential to the team’s selection process, as these are what will allow a business to defend or improve its market position and deliver growing profits to its shareholders.

The managers adopt a well-established, bottom-up, fundamental analysis approach and are supported by BMO Global Asset Management’s well-resourced small-cap and global equities teams.

They produce detailed analysis of each potential investment, including valuation targets and sell triggers.

Cosh and Morris monitor all positions continuously. Their approach is benchmark agnostic and they are happy to adopt a contrarian stance when a business satisfies their investment criteria.

The managers’ focus is on quality, and they believe the evolution of a company’s profits and cash generation will be the principal determinant of shareholder returns.

However, they view valuation as another important driver of long-term performance and they are disciplined about adopting or adding to positions only at the right price.

They look for companies that trade at a substantial discount to their intrinsic value. Businesses that meet EAT’s investment criteria but are not trading at acceptable valuations are placed on a watchlist of stocks, awaiting a better price entry point.

This allows the team to execute quickly when opportunities present themselves.