European Assets Trust (EAT) announced its results for the year ended 31 December 2022. NAV return was 28.2% for the year ended 31 December 2022. This compares to -17.7% for the benchmark, EMIX Smaller European Companies (ex UK) Index. Shares fell 28.4% in sterling terms over the same period. The company also announced a reduced dividend of 5.80 pence per share compared to 8.80 pence the year prior. Despite the tough year, the discount managed to stay reasonably tight, closing at around 3.5% at year-end, although this has widened to close to 10% through 2023.
While the challenges during the year have been well-documented, the underperformance of the benchmark by more than 50% is a disappointing result. The underperformance reflects the drastic thematic swings throughout the year from quality and growth stocks, of which EAT has considerable exposure, into value areas. This was exacerbated further by the company’s exposure to an under-pressure consumer and some ‘COVID-19 beneficiaries’ that suffered from a normalisation of demand.
Regarding the performance, lead investment manager Sam Cosh added:
“Our portfolio performed poorly last year, significantly underperforming the index. The main reason was the dramatic rotation out of quality, growth stocks into value areas of the market. This was caused by interest rate rises which have a detrimental impact on the valuation of companies whose value is derived from cash flows that grow over a long time frame. This rotation was exacerbated by the strong moves in commodities, the only major asset class that registered gains last year, driven by a rush towards energy security following the war in Ukraine. Our philosophy and portfolio style are biased towards growth companies, so it is perhaps no surprise that we performed poorly, however, we are clearly disappointed by the scale of our relative underperformance”
Commenting on the outlook, Sam continued;
“The year had started strongly, with Europe pleasingly leading the way. This has, however, been derailed by the failure of Silicon Valley Bank (SVB) in the US and Credit Suisse in Europe. This has caused a significant sell-off across the market driven by the financial sector. The failure of any financial institution brings back memories of the Global Financial Crisis, however we think, there are reasons to be less concerned this time. Financial regulation in terms of capital requirements and funding, particularly in Europe, are much more robust, whilst central banks and financial regulators have reacted quickly. There will, however, be some significant ramifications from this of which some will not be understood yet. Initially, it is fair to assume that credit conditions will be tighter, adding further to the challenging calculations that central bankers are having to make with regard interest rate rises.
“In terms of stock picking the clear lesson from recent events is to avoid companies whose business models have been supported by low rates and are challenged by the dramatic change in interest rate regime that we have seen over the last year. There will be further casualties, but we believe our quality biased approach avoids such exposure. We are, however, looking closely at the opportunities that may present themselves as good businesses potentially get dragged down by recent events. Prior to the sell-off, Europe looked attractively valued both in absolute levels and relative to global markets. This provides an attractive backdrop to stock picking and future long-term returns.”
EAT : End of a challenging year for European Assets Trust