For the year ended 31 December 2016, Fidelity European Values says that its net asset value total return per ordinary share was 17.6%, underperforming the Benchmark Index, the World Europe (ex-UK) Index, which returned 19.7%. The share price total return, however, lagged the NAV return at 7.6%, as a result of the level of discount (ex-income) widening from 2.9% at the start of the year to 11.1% at the end. The final dividend is 4.17 pence, up 25.2%.
The manager’s report says that the underperformance was partly due to companies in the pharmaceutical sector. The shares of Novo-Nordisk were hit when management downgraded earnings expectations owing to pricing pressures in the company’s diabetes franchise in the US. The announcement that the well-respected CEO was retiring at the end of the year also added to the uncertainty. The company, which has a strong long-term record of dividend growth, is now selling on a healthy dividend yield of over three percent. The insulin market continues to see strong volume growth given the growing incidence of diabetes and the company also has an exciting pipeline of new products. 2017 is, however, likely to be a transition year for Novo-Nordisk as Eli Lilly’s biosimilar, called Basaglar, continues to put pressure on pricing in the US market for basal insulin. The other holdings in the pharmaceutical sector, Roche and Sanofi, both also suffered from the more general concerns around pricing pressure in the US and the threat of additional action by both Presidential candidates. Given the Republicans, who control Congress, have typically been supportive of the industry, recognising its record on innovation and its contribution to restraining hospital costs, we expect these companies to be able to continue to grow their dividends from increasingly attractive levels of yield.
Holdings in the energy sector, by contrast, contributed very positively to performance as it became clear that both Shell and Total have begun to address their operating and capital expenditures, in light of the lower oil price, to improve returns. These companies have high dividend yields but are not currently growing their dividends. The prospects for future dividend growth improved as the year progressed and as the oil price doubled from its lows in the early part of the year. This has resulted in higher share prices and your Portfolio Manager still thinks there is the potential for further gains as both companies start to generate enough cash to cover and, indeed, increase those dividends.
Finally, 3i Group, one of the few UK-listed companies in the portfolio, delivered a very strong performance during the year largely due to a revaluation of their largest portfolio company, Action, a Benelux-based discount retailer, which is rapidly and successfully expanding into France and Germany.
FEV : Fidelity European Values held back by pharma exposure