Strong performance from stock selection for shareholders of Fidelity European Values – As well as the NAV of the company beating its benchmark and a narrowing of the discount, the highlights of the final report for Fidelity European Values (FEV) included a new and lower management fee structure and an increase in the dividend.
In addition, the board is proposing an amendment to the the investment objective of the fund to put before shareholders at the AGM (15 May 2017). It will be amended to allow the fund manager wider access to other transferable securities and derivatives to European assets to gain additional market exposure (gearing) and for investment purposes.
Performance
The company delivered positive outperformance in its annual results for the year ended 31 December 2017. Its NAV rose by +20.0% (total return). The benchmark index, the FTSE World Europe (ex UK) index, returned 17.5% on the same basis.
The share price total return was 26.2%, which is ahead of the NAV total return as a consequence of a narrowing of the discount from 11.1% at the beginning of the year to 7.0% at the end of the reporting period, based on the NAV excluding income (all figures in UK sterling).
Stock selection was the main driver of this outperformance. In the report Sam Morse, the fund manager commented that this was dispersed across a number of sectors. Holdings in the financials sector performed well for the portfolio and he cited a positive contribution from property company Société des Bains de Mer de Monaco.
Dividend
The increase in the proposed final dividend for 2017 of 4.35 pence over the 4.17 pence paid for 2016 is 4.3%. Although the principle objective of the company is not to provide income, it is as a result of the manager’s investment focus on companies capable of growing their dividends has seen the company’s dividend payments rise.
Management Fees
Following a review of the management fees payable to Fidelity (the managers of the fund), it has been agreed that the existing annual flat fee rate of 0.85% will only apply to the first £400 million of funds under management and that a new rate of 0.75% will be applied to funds in excess of £400 million. This will begin 1st April 2018. At the current size of the trust this should be a lower fee of 0.79%.
The company has also agreed to follow the AIC’s SORP recommendation to split the fees between capital and revenue.
Fidelity have decided to absorb the cost of external investment research, which under the rules established by the MiFID II rules can no longer be covered from broker dealing commissions.
Extract from manager’s report
“Among sectors there was quite a notable dispersion of performance in 2017. The energy sector endured a poor first half of the year as analysts questioned the ability of the large integrated oil companies to generate cash and cover dividend payments against the backdrop of a stalling recovery in the price of the commodity. This negatively impacted both Royal Dutch Shell and Total which are the Company’s two holdings in this sector. Both companies, however, demonstrated their ability to improve cash flows, as quarterly results progressed, by cutting operating and capital expenditure and Royal Dutch Shell ended the year on a positive note by detailing plans, at its strategy day, to remove the scrip element from its dividend.
Healthcare stocks struggled for much of the year suffering from a weaker dollar, given that much of their sales and profits are sourced in America, and from continued pricing pressures in all geographies. While Sanofi and Roche performed relatively poorly, with little relief from new drug launches, Novo Nordisk performed strongly, rebounding from a disappointing 2016 with investors re-rating the company as earnings revisions stabilised and on the approval of its new diabetes drug, Ozempic.
The strong performance of technology stocks on Wall Street has been well documented but the continental European sector also had a strong year which helped the Company given its double weighting in the sector with holdings in ASML, Amadeus IT Group, SAP and Dassault Systemes.
The largest contributor to outperformance for the Company was, however, the financial sector with strong returns from many of the bank holdings, such as ABN Amro, Intesa Sanpaolo and KBC, as investors warmed to their high and growing dividends and as the fear of harsh Basel IV regulation subsided towards the end of the year.
There were two other notables during the year from a stock-picking perspective. The star of the year was Société des Bains de Mer de Monaco which almost doubled in value. The company’s shares sparked to life in the last quarter, after a few quiet years, when its majority owner, the State of Monaco, added to its stake by buying out a sizeable shareholder. The shares jumped again when the company subsequently confirmed that its two major property redevelopments, the Hotel de Paris and Sporting D’Hiver, were on time, with completion by end 2018, and were on budget. Elior, the catering and concessions business, was by contrast a poor performer in the second half of the year, falling on disappointing guidance for next year which followed hot on the heels of the resignation of the Chief Executive. The holding has subsequently been sold given that the company is no longer growing its dividend and financial leverage .”
FEV : Strong performance from stock selection for shareholders of Fidelity European Values