BlackRock Greater Europe has a great year – BlackRock Greater Europe Investment Trust has announced results for the year ended 31 August 2018. The NAV increased by 11.8%, well ahead of a rise of 1.4% in the World Europe ex UK Index. The share price rose by 12.5% over the same period. The revenue return per share amounted to 5.95p per share (5.33p per share for the previous year), an increase of 11.6%. Underlying earnings rose due to the receipt of £430,000 in French withholding tax reclaims. The total dividend for the year will be 5.75p per share (2017: 5.45p), an increase of 5.5%.
Extract from the manager’s report
“Materials and aerospace and defence markets… benefited from a strong inflection in demand for airplanes, so much so that some are being taken out of ‘retirement’. This has been positive for our holding in Safran which has executed strongly on its new LEAP engine roll-out. Their long-term service contracts also look robust, with aftermarket sales performance healthy, both of which are positive for the company’s cash flow. A position in Thales has also performed well with management announcing earnings growth 10% ahead of expectations for the first half of 2018. Despite increasing the group’s Research and Development spending by 14% year-on-year, the profit margins have continued to increase.
Technology has been another area where the Company realised positive returns. A holding in Hexagon, a market leader in measurement quality tools for industrial and consumer industries, performed strongly over the period. At the onset of the year, the CEO was cleared of insider trading accusations which led to a relief rally for the shares. Further to this, the company continues to execute strongly. Their second quarter results highlighted a sequential increase in organic sales growth to 9%, complemented by both margins and earnings numbers ahead of consensus expectations.
Elsewhere in technology, allocation to an Initial Public Offering (IPO) in payments processor Adyen contributed strongly to performance. We allocated to this stock as we felt that Adyen’s approach to customer penetration and ability to win market share in a structurally growing market was positive for potential earnings. Management are guiding for 40%+ growth in 2018. The stock performed exceptionally strongly given the high level of demand for the shares, with order books for the IPO reaching 40x coverage. The company reported results towards the end of August, showing +67% revenue growth year-on-year.
Holdings in the health care sector have also been rewarding for the Company in the year to 31 August 2018. We continue to have a preference for allocating to medical technology stocks over large-cap pharmaceutical companies, where we see idiosyncratic stock issues across a number of companies pertaining to price, pipeline and patents. Lonza Group, a leading chemicals and biotechnology company and the largest holding within the Company at present, provided robust returns over the year. Lonza continues to see accelerating growth rates which led management to upgrade their underlying revenue target at their latest results.
The Company’s performance was negatively impacted from being underweight the oil & gas market, which rallied over the year in response to the rising oil price. A mix of sanctions on eastern countries, coupled with the implosion of production in Venezuela and bottle-necks in the Permian basin, led to a constraint in supply and consequently an increase in the price of oil. Whilst
this has been supportive for European oil majors, we do not fundamentally believe they have the ability to sustainably improve earnings due to years of underinvestment. As the oil price rises, so do the costs associated with the required investment. We have preferred to hold oil exposed assets in the Emerging European market where we find superior fundamentals.
The lower allocation to financials versus the reference index also contributed to performance over the period. The financial sector, and in particular the banking sector, fell over the period in response to the changing expectations for interest rates in the Eurozone. Following the increase in uncertainty emanating from the Italian political situation, expectations for rates rises were pushed out to the second half of 2019. Banks, as an industry positively exposed to rising rates, saw expectations for earnings fall on this move, aiding the Company. Stock selection in this area, however, was less positive. The largest detractor over the year was a holding in Danske Bank. Whilst Danske operates in superior markets for banking than most Eurozone players, realising
higher rates of loan growth with a stronger pricing discipline, they have been plagued by headlines surrounding investigations into money laundering in Estonia. The said event is thought to have taken place between 2011 and 2015. Although the primary regulators have broadly resolved this issue and imposed only small fines, Danske has committed to donate the entire income from that
division, which will be taken as a cost on this year’s income statement. Whilst revenue growth continues, this additional cost has led to lower net interest income this year. At present, we continue to hold the stock as we still believe Danske Bank is one of the highest quality names within the European banking sector.
Within the emerging market space, we also realised negative performance in financials holdings. A holding in Greek listed Alpha Bank fell in line with the European financial sell-off given increased political risk. Russian listed Sberbank declined as the market took a pessimistic position on the state-owned bank, again due to political tensions around the fresh round of sanctions imposed on Russia for its actions in Ukraine and Syria and cyber activities aimed at the West.
Overall, however, Emerging Markets continue to be a rich source of returns for the Company, contributing positively to both absolute and relative returns. To specify a few, the holding in Israeli Chemicals contributed to returns as the stock rallied in response to rising potash prices driven by Chinese demand and escalating production issues at its competitors. Stock selection in Russia also contributed with the overweight in Russian energy names, such as Novatek, Gazprom and Rosneft, generating strong returns following the rally in oil prices. The underweight in Turkey benefited relative performance, as the market declined on currency weakness arising from concerns of the persistently high inflation and expanding twin deficits.”
BRGE : BlackRock Greater Europe has a great year