European Opportunities (EOT) has released its interim results for the half year ended 30 November 2023. Selected highlights as follows:
- EOT generated a NAV total return of 4.3% over the period and a share price total return of 7.7%. Both of these represent an outperformance relative to EOT’s benchmark, the MSCI Europe Index, which returned 3.5%.
- The biggest contributor to EOT’s NAV return was Novo Nordisk, the Dutch pharmaceutical company and a world leader in diabetes and obesity treatment. Novo Nordisk is the largest holding within EOT’s portfolio – a 12.7% position at the financial year end, representing a 9.4% overweight relative to the benchmark. During the half year, Novo Nordisk was up 25.1%, contributing 2.7% to the NAV return. The team saw fit to trim the Novo Nordisk holding during the period as part of good portfolio management.
- Other noteworthy contributors included RELX, the British information and analytics company, which added 1.7% to EOT’s performance, and SOITEC, the French semiconductor component manufacturer, which added 1.0%.
- The largest detractor to EOT’s performance was the position in Bayer, a 2% holding at the end of November, which was down 39.4% over the half year due to legal issues the company faces in the US.
- EOT’s portfolio was thinned down over the period, with the number of holdings cut from 33 to 29. Two new positions were added over the period: Camurus and Thales.
- EOT’s board was proactive in defending EOT’s discount, repurchasing 2.2m shares over the period, for a total consideration of £17.2m. Over the period, EOT’s discount narrowed from to 11.5% to 8.0%.
- A 25% tender offer was initiated following the passing of the continuation vote at EOT’s AGM on 15 November 2023. This was implemented in January 2024 and was fully taken up, reducing EOT’s net assets under management by 25% to £696m as at the end of January.
Alexander Darwall, VIO of Devon Equity Management (EOT’s investment manager), commented:
“The outlook for the portfolio is shaped against a more difficult economic backdrop. Whilst interest rates are expected to decline over the next eighteen months, this is only one factor to consider. Buoyancy of European consumer spending is likely to be tested in 2024. The market has been sustained by the resilience of the European economies but as household savings are used up, and as quantitative tightening grinds on to reverse the expansionary effects of quantitative easing, in due course, the present benign economic conditions will give way to a much tougher economic climate.
“There are signs of weaker consumer spending. Energy costs are at present lower than might be expected with various conflicts around the world causing disruption to energy trading. Yet the risk of higher energy costs remains a significant consideration not least because Europe’s rapid energy transition risks putting European manufacturers at a relative disadvantage. The combination of weak public finances and the need for increased defence spending is likely to squeeze discretionary consumer spending. This provides a further incentive to invest in companies that have strong extra-European businesses.
“Trade conflicts are an increasing concern. Globalisation has been a salient feature of economic growth in recent years and the growing threats to efficient global trade flows are clearly damaging. We are careful to try and identify companies whose overseas trading falls below the radar of political interest.
“The outlook for the portfolio is, we think, improving. Our portfolio is less exposed to weaker consumer demand and the risk of higher input costs. The extent to which the portfolio delivers is much less macro related, and more driven by individual companies crystalising their transformational opportunities. Concluding successful clinical trials, continued innovation, resiliency of business models, and geographic expansion are some of the outcomes that we anticipate from our investee companies this year. These companies have the necessary ingredients for success: we expect them to deliver.”
[QD comment: It has clearly been a good six months for EOT with the manager’s confidence in Novo Nordisk rewarded, showing the value of good stockpicking. Given its focus on ‘special’ growth companies (these typically benefit from strong IP, an advantageous industry structure, strong balance sheets, high recurring revenues, and multiple avenues for growth), it should be able to weather economic downturn, although its ultimate performance will be driven by whether its manager has got its stock selection decisions right, rather than the performance of the European market more generally. Though given the recent outperformance, combined with the tender offer and buyback, the tide seems to be favour of EOT’s shareholders currently.]