Part of the European smaller companies sector, European Assets (EAT) has released its annual results to end-December 2019. In sterling terms, the share price and NAV total returns came in at 25.7% and 19.8%, with stock selection driving performance (sector allocation detracted slightly). The best performance came from ASM International, the Dutch listed semiconductor equipment supplier, which rose +168.5% in sterling terms. EAT said that its strong year came as most of the sector struggled.
Some of the drivers included:
- Italian asset manager, Azimut, that rose +130.3%. The shares had performed poorly last year precipitating a review of our investment thesis. Our decision to maintain the holding was vindicated as the company continued to demonstrate attractive inflows but also, more significantly, announced a change in their fee structure, reducing their reliance on performance fees.
- Another holding in the financial sector, Ringkjoebing Landbobank, also produced excellent returns. The Danish listed regional bank rose +45.9% as it upgraded its expected profits for the year due to strong loan growth.
- CTS Eventim, another one of our largest positions, was also a significant contributor rising +64.2%. CTS is a German listed and European market leader in online ticketing. This is a high-quality company with a robust balance sheet, high margins, and is cash generative. Growth has been driven by the transition from paper ticketing to online, rising ticket prices and acquisitions. The company delivered strong results, but perhaps more importantly announced an acquisition of the leading French online ticketing provider, which appears to be significantly value accretive.
Detractors:
- Consumer Staples where our positions underperformed a sector which also lagged the market.
- Sligro Food, the Dutch food service business, was the main detractor falling -33.1%, They struggled to integrate a large contract with Heineken, which led to extra costs and problems with delivery. While we believe the deal will ultimately leave them in a strong position, we think that the integration will continue to be challenging, so have sold the position.
- We have also sold one of our long-standing holdings, Viscofan, the Spanish listed synthetic sausage skin producer.
No exposure to real estate detracted
In terms of sector allocation, EAT’s largest detractor was real estate where they currently have no exposure. Explaining this. the trust said that they believe European real estate companies, where leverage, or use of debt, is integral to their business models, have been the principal beneficiaries of the low interest rate environment. Ultimately, EAT was not able to find stocks in this sector with a sufficient margin of safety which would produce a sufficient long-term return at an acceptable level of risk.
Outlook and covid-19
This is the outlook provided by EAT’s manager: “2019 ended with optimism that cyclical indicators had stabilised and that 2020 was likely to be a year of economic recovery. The consensus also assumed that central banks would protect against any disappointment in growth through further action.
The outbreak of the coronavirus has, however, superseded these expectations, driving severe volatility in our markets. The direction of equity markets from here will likely depend on whether the impact of the virus turns out to be a relatively short-lived event or more sustained. The longer the epidemic takes to contain, the more likely the global economy will suffer. Many central banks have already recognised this danger by cutting interest rates, yet it seems difficult to understand, absent of a short boost of liquidity and confidence, how this will cushion any economic impact. What this episode could, however, encourage is a more active approach of governments towards more constructive fiscal policies, not least because monetary policy is all but exhausted. We are seeing tentative signs of this already, with the UK government being more expansive, and the German government loosening their fiscal restrictions, albeit temporarily. This could herald the next phase of the market cycle which is likely to be very different from what we have seen since the great financial crisis.
Turning to the portfolio we are in the fortunate position not to be leveraged heading into this market volatility. This allows us to look at this period constructively. Whilst we will not do anything rash, we will use equity market falls to slowly add some quality companies to the portfolio. These are companies that we have looked at in detail previously but have not been sufficiently attractively priced for an investment. Over the long term, whilst unwelcome, this challenging period should therefore be an opportunity to build towards attractive long-term returns.”
Also of note over 2019, EAT completed its re-domicile from the Netherlands to the UK over 2019, which we covered last March.
EAT: Stock selection drives strong results from European Assets