Over the year to 30 September 2016, European Investment Trust’s NAV per share increased by 12.3% from 742.2p to 833.8p. After taking account of dividends paid in the year of 16.0p per share, the NAV total return was 14.9%. This compares with the total return of 21.8% from the fund’s benchmark. The share price increased by 7.4% from 673.0p to 722.5p. The discount rose from 9.3% to 13.4%. The share price total return was 9.8%. The Board is recommending a final dividend of 16.0p per share and a special dividend of 6.0p per share (which includes 3.0p arising from the settlement of a historic tax reclaim), giving a total of 22.0p per share. This compares with the prior year total dividend of 16.0p per share, which comprised a final dividend of 14.0p and a special dividend of 2.0p per share.
The chairman says the disappointing relative return follows from the continued lack of favour in the markets for the fund’s value-based approach to stock selection.
Craig Armour’s manager’s report discusses a number of the fund’s sector exposures. We reproduce this section here:
“An area of the equity market which has been out of favour for some time has been banking stocks. The challenges facing banks are well-known, including regulatory pressure to hold more capital, tepid loan demand, litigation and conduct charges and managing the transition to digital banking. Add in the margin squeeze from low interest rates and the return on equity across the sector has fallen substantially. However banks today have higher levels of capital, are better funded with improved liquidity and have more appropriate loan provisioning. Many of our holdings are trading at significant discounts to book value and have solid dividend yields. While banking stocks made a small positive contribution to performance during the year, the valuations remain attractive and the portfolio exposure at the year-end was 15.2% of net assets.
Our oil and gas holdings performed well in aggregate during the year. Our holdings in the major stocks such as Royal Dutch Shell and Total responded well
to the recovery in the oil price and to the efforts of the companies to cut costs. Our holding in seismic testing company, Petroleum Geo-Services, continued to struggle against this backdrop of cost-cutting and performed poorly although, since the year-end, it has announced improved results, indicating that exploration activity is starting to improve. We retain a positive outlook on the sector which had a year-end portfolio weighting of 12.4% of net assets.
Our industrial stocks generally performed well, led by Dutch mail operator PostNL. With a stronger balance sheet after disposing of its stake in TNT Express, the company attracted bid interest from Belgian mail operator BPost. Another strong performer in industrials was Swiss engineer ABB and we sold this holding on valuation grounds.
We suffered a loss on our holding in asset manager GAM which issued a profit warning. After reviewing the prospects for the range of funds managed by the company and in particular, the outlook for performance fees from its flagship funds, we decided to sell the holding.
The stock with the greatest exposure to the UK is Ryanair, which earns around 25% of revenues in sterling. After a sharp fall in the aftermath of the vote in June 2016, the share price has recovered as it continues to deliver strong growth across its markets. As a low cost provider in a segment of the airline market which continues to gain market share, we believe Ryanair remains a solid long-term investment case.
We have continued to sell stocks where the valuations fully discount the prospects and replace them with stocks where we believe the growth prospects are not captured in the valuation. Examples include Swiss-based staffing company, Adecco, and aircraft manufacturer, Airbus. In the case of Airbus, which along with Boeing dominates the market, the long-term demand from Asia in particular underpins demand, and the absence of any new models over the next few years should benefit both margins and cash flow.”
EUT : European Trust underperforms as value style remains out of favour