Fidelity European Values says that, during the six months ended 30 June 2016, its NAV total return was 7.6% compared to a total return of 4.8% for the FTSE World Europe (ex UK) Index which is the Company’s Benchmark Index. The share price total return was -3.8%, which is behind the NAV total return as a consequence of a significant widening in the share price discount to NAV (all figures in UK sterling).
Over the period, the main positive contributor was Royal Dutch Shell which benefited from a higher oil price and a positive reaction to its strategy update, in which management committed to further reductions in operating costs and capital expenditure to enable the company to achieve higher levels of cash generation.
Other strong performers included L’Oreal, where strong first quarter results suggested that organic growth will accelerate again, and the 3i Group which upgraded its valuation of its key asset, the European discount retailer Action, following a period of strong operating performance.
The main detractors, over the six month period, were the Company’s holdings in the financial sector, which accounted for seven of the top ten losers. The impact of the ‘Brexit’ vote on capital markets and the expectation that interest rates will stay “lower for longer” has pressured banks like Intesa, UBS and ABN while GAM suffered from a profit warning, largely related to a lack of performance fees. While the operating environment for these financial companies has worsened, valuations have also fallen very substantially such that some of these companies are now looking quite attractive on long term valuation measures. The capital and liquidity position of European banks is much improved since the global financial crisis so, in many cases, these companies will be able to continue to pay attractive dividends and will not need to raise new equity, even in a more difficult environment.
Among non-financial holdings, SES, the satellite provider, saw its share price struggle when it raised equity to buy out the minorities in a loss-making subsidiary, O3B, just after its peer Eutelsat had issued a profit warning. They remain confident that O3B will, ultimately, prove a valuable investment for the company, which is not reflected in the current valuation.
FEV : Fidelity European let down by widening discount