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European Trust results show why it moved manager

European Trust results show why it moved manager – European Trust, which recently appointed Baillie Gifford as its manager, has just published results covering the year ended 30 September 2019. They make for grim reading – over the period the trust returned -4.6% in NAV terms and -7.6% in share price terms. This compares to a positive 6.9% return for its benchmark – the All-World Europe ex UK Index. Over five years the trust’s NAV returns are almost 30% behind its benchmark.

The only bright spark was a significant increase in the dividend from 27p to 31p – but Baillie Gifford has already pointed out that it expects dividends to be loer under the new strategy, which is aimed at improving total returns by focusing on growing companies. QuotedData analyst, James Carthew, wrote an article about the transition recently.

Ongoing charges rose slightly from 0.61% to 0.62% – the shrinkage of the fund will be a factor in this.

The outgoing managers say that their underperformance is all about style “Since the financial crisis of 2008, our valuation-led approach has been out of favour. The monetary policies adopted by central banks were designed to support economic growth and avoid recession and, in this respect, they appear to have succeeded. However, markets have become reliant on monetary policy and valuations have become distorted by artificially suppressed interest rates. In this environment, investment strategies focussed on perceived “growth” and “quality” have worked well, whereas “value” strategies have lagged. This has led to investors crowding into areas of the market such as consumer staples which are regarded as defensive irrespective of the absolute valuation levels. We have avoided these stocks, as we believe they are trading on expensive valuations which represent a significant risk to shareholders’ capital.”

Stock contributions

The largest positive stock contributions came from Roche, Getinge and Sopra Steria (together adding 3.1% to performance). The largest negative contributions came from Petroleum Geo-Services, Leoni and Commerzbank (together subtracting 4.6% from perfiormance).

The largest positive sector contribution came from Health Care, which now comprises two industrial groupings, the first is: Pharmaceuticals, Biotechnology & Life Sciences; and the second is: Health Care Equipment & Services. The best performing stock was Roche, the Swiss-based industry leader, where pipeline success has filtered through to the earnings outlook. Close behind was Swedish-based medical equipment supplier, Getinge, where there is increasing evidence that a recovery in operating margins is underway. After the year end, Getinge’s share price continued to rise and, with the valuation now discounting a robust margin recovery, we sold the shares. Within the Communication Services sector, the Polish-based Cyfrowy Polsat performed well. In the Information Technology sector, Sopra Steria, the French-based group, was another good performer as it continued to deliver growth in its core IT services business.

Banking stocks were an area of continuing weakness as the combination of low interest rates and recessionary fears weighed on their prospects. Commerzbank was the most severely impacted, reflecting its acute interest rate sensitivity and weakness within the German Industrial sector, where it is a significant lender. All of the portfolio’s bank holdings delivered negative returns, apartfrom Italian financial conglomerate, Mediobanca. As noted below, we sold a number of bank holdings during the period, but at the end of year under review 9.7% of the portfolio was held in banking stocks, reflecting our belief that the stocks still held remain undervalued.

Energy stocks were weak, in contrast to the previous year. The share price of Petroleum Geo-Services fell sharply when it delayed its planned bank refinancing. After the year end, the company announced good results and the share price staged a sharp recovery.

The weakness in the Industrials sector was largely driven by PostNL, due to regulatory uncertainty over its proposed takeover of its main competitor in mail delivery, Sandd. The Dutch Government approved the transaction in October 2019 and the share price has started to recover. There was continued weakness in the share price of auto supplier, Leoni, despite the appointment of a new chief executive officer who has implemented a recovery plan which appears to be stabilising the business.

EUT / BGEU : European Trust results show why it moved manager

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