The European Investment Trust has announced its interim results for the year ended 31 March 2016. During the period, the trust provided an NAV total return of 2.2%, thereby underperforming FTSE All-World Europe ex UK Index, which returned 6.9% in sterling total return terms. The managers say that, in their view, the underperformance reflects a continuation of the tendency of European markets to place high valuations on stable growth companies, extending what they believe to be a valuation anomaly. However, during the period, the euro strengthened by 7% against sterling, which enhanced returns for sterling-based investors investing in European equities. During the period, the trust’s share price decreased by 3.3% from (673.00p to 651.00p – a fall of 3.3%), whilst the share price total return was -1.0%. This reflects a widening of the trust’s share price discount to NAV from 9.3% to 12.3%.
In terms of the performances of specific companies and portfolio activity there is little detail in the announcement and so we are unable to comment on it here. However, the managers do say that following equity market falls, at the beginning of 2016, they took the view that some of the reasons behind the falls were erronous and that, by the middle of February, the valuation of the portfolio had fallen to levels not seen since the time of the Global Financial Crisis in 2008/09 and the Eurozone crisis of 2011/12. This prompted the manager to use the trust’s recently agreed borrowing facility (this is the first time the trust has been geared during the current manager’s tenure) and, as they reportedly had confidence in the outlook for the trust’s existing portfolio, they invested across a range of portfolio holdings, with the investment skewed slightly to recent underperformers. As at 31 March 2016, a total of €11.1m, equivalent to £8.8m and a borrowing level of 2.8% of the trust’s net assets, had been drawn down under the facility at an initial interest cost of 0.8% per annum.
In terms of outlook, the managers say that, overall, European economic growth prospects are adequate and valuations (after the sharp falls and the recent rebound) offer reasonable long-term returns, in their view. They say that the most critical risk for European equity markets, at present, is expected to be from political developments within Europe and/or extraneous factors.
European IT’s managers say market’s focus on stable growth has driven underperformance : EUT