European Opportunities Trust (EOT) has released its annual report for the financial year ending 31 May 2023.
- Over the 12 month period EOT reported a NAV total return of 3.3% and share price total return of 5.0%, this represents an underperformance versus its benchmark, the MSCI Europe Index, which returned 6.9%. This underperformance can be attributed to EOT’s relatively low exposure to sectors like defence, financials and luxury goods, which were amongst Europe’s top performers.
- The manager would rather focus on stock-picking than sector selection, with its largest contributors being the pharmaceutical giant Novo Nordisk, the payment solutions firm Edenred, and Infineon, the semiconductor manufacturer.
- EOT paid a dividend of 3.5p per share for the year, a 40% increase on the prior year’s. As a reminder, a dividend reinvestment plan is available to shareholders.
- EOT’s discount narrowed over the period, ending on a discount of 10.9%, compared to the 12.3% it started on. EOT currently trades on a discount of 11.2%. The board has been proactive in managing EOT’s discount, having purchased £30.7m worth of shares over its financial year.
- EOT will now operate with a reduced management fee. Devon, the investment management firm, is now entitled to 0.80% per annum on net assets up to £1bn; 0.70% per annum on any net assets over £1bn up to £1.25bn; and 0.60% per annum on net assets above £1.25bn. Previously Devon was entitled to 0.90% per annum on net assets up to £1bn and 0.80% in respect of any net assets above £1bn.
Alexander Darwall, CIO of Devon Equity Management and manager of EOT, commented:
“Investor sentiment regarding Europe is not good. Europe has been a structurally lower growth region than North America and Asia. This pattern is unlikely to change soon. Indeed, Europe remains vulnerable to further energy shocks. The EU’s target, as set out in its ‘Fit for 55’ is the reduction of EU emissions by at least 55% by 2030. The corollary is that renewable energy should reach 45% share of the total energy mix by 2030. Reaching these goals has an economic cost. Accordingly, we select companies that have a global reach, tapping into faster growing regions, and companies where energy costs are a lower component of the overall cost base.
“The European economy has proved to be surprisingly resilient, buoyed by robust consumer spending. Driven by the joint impacts of monetary and fiscal stimulus, the post-pandemic period has been one characterised by abundant liquidity and a resilient consumer. However, as the ECB’s asset purchases continue to unwind and consumers deplete their pool of excess savings, we see a different dynamic unfolding, a less resilient economy and more subdued consumer spending.
“Our companies, typically, have lots of intellectual property (IP) and innovate extensively, meeting customers’ needs. New technologies will continue to drive innovation and create new business opportunities. Most prominent of these emergent technologies is Artificial Intelligence (AI). In our view, the biggest beneficiaries of this development will be those companies that have proprietary, monetisable data, and those that provide infrastructure to accommodate significant computing applications, fitting exactly the profile of our investee companies. These same IP intensive, innovative businesses have pricing power and discipline, a crucial factor in softer economic conditions. We remain confident in our strategy and in the positioning of our portfolio. Our lower exposure to consumer spending and input cost dependency positions us well. Moreover, the strong balance sheet and profitability profiles of our companies positions them well not only to survive in more challenging conditions, but to thrive as competitors lack the cash flows to invest through the cycle and as new M&A opportunities emerge.
“Our style has remained consistent throughout the 23 years since the Company’s launch in November 2000. We invest in companies with exceptional, idiosyncratic growth prospects, that succeed through the cycle, owing to the value proposition their products represent to customers. Notwithstanding our concerns about widespread investor apathy, we continue to identify and invest in special companies which enjoy structural growth. This is the basis of our confidence in the medium-term prospects for the Company’s portfolio.”