The European Smaller Companies Trust has published results covering the 12 months ended 30 June 2024. The NAV total return of 12.0% was 1.9% ahead of the benchmark MSCI Europe ex UK Small Cap Index. The share price total return was 19.5%, reflecting a narrowing of the discount. The company repurchased a total of 6.4m shares in the market at an average price of 167.68p.
The total dividend was upped by 2.1% to 4.80p. This was covered by revenue of 5.41p, up from 5.22p. The statement says that the company has benefitted from a handful of stocks that have had very high income distributing capacity in recent years, but as the fund management team begins to anticipate an economic expansion, there may be more of a pursuit of capital growth in future.
Extracts from the manager’s report
The company benefitted from our investment in Dutch listed wealth manager Van Lanschot Kempen, which continued to attract strong fund inflows in the low countries. Swedish listed digital investment platform Nordnet saw an increase in business momentum as animal spirits revived in their market.
One of the joys of managing a European smaller companies portfolio is that the investable universe is so fabulously heterogeneous that we are able to find companies that are benefitting from almost any exciting trend in the world. One such trend that has obsessed the stock market this year has been AI and the growth in data centres. Swedish listed Munters, whose products help manage the climate inside data centres, has seen a terrific boost to its business as a result of this and it has been a worthwhile investment for your company.
Another area of exciting growth is in the world of podcasts, a media broadcast over the internet and which is used for exploring any topic that interests a listener. Swedish listed Acast is the European leader in hosting, distributing and monetizing podcasts. The stock has performed very well this year as the company approached profitability and continued to grow strongly in a weak advertising market.
Corporate activity returned to the European smaller companies space with bid approaches for Swedish online gambling company, Kindred and Swedish legal services expert Karnov. Whilst we didn’t think we captured all the value possible from Kindred, the offer was reasonable and we decided to take some profit. However, we, and many other public market investors, deemed the bid for Karnov to be too far from its fundamental valuation and rejected it. We are firmly of the belief that as interest rates begin to fall the very cheap valuations on display in the European smaller companies market will see a notable increase in this type of activity.
Detractors from performance have been largely driven by our misjudging where several companies were in their economic cycle, but also (unusually) by a handful of stocks that we missed the opportunity to invest in. The sins of omission mainly comprised our failure to spot Danish listed GLP-1 anti-obesity drug develop Zealand Pharma and Spanish bank Banco de Sabadell, which weighed on the company’s relative performance. In contrast, our investment in Dutch listed specialty metal producer AMG Critical Materials, which has suffered due to the abject collapse in the lithium price over the course of the year, detracted from performance. Lithium prices have been poor for a combination of reasons, but the principal one has been the weakness in the automotive market for electric vehicles (EVs) due to regulatory uncertainty on the green transition as well as interest rates. We have had too much exposure to the automotive market and a number of burdens for the company such as German listed producer of electric boot openers Stabilus, Italian listed producer of stators and rotors for EVs Eurogroup Laminations and French listed producer of Silicon Carbide used in the rapid charging of EVs Mersen have not helped performance.
It has been a frustration to relearn some fundamental investment lessons through the medium of making mistakes, but disappointingly we have been through that process this year. One such lesson is not to bet on a binary technology outcome and German listed Manz whose battery technology had looked so promising for the EV transition has failed to turn the science into cash flow. This lesson was rammed home by our investment in Swiss listed AMS-Osram whose exciting microLED technology was abandoned by their large American tech company customer, who has historic form in rough treatment of its supply chain. We intend to do a better job of applying such lessons in the future without the impact on our investors’ capital.
ESCT : European Smaller Companies Trust reports decent results