Growth company headwinds weighed on Montanaro European Smaller Companies

The Montanaro European Smaller Companies Trust (MTE) reported its annual results for the 12 months ending 31 March 2024.

• MTE reported a NAV total return of 4.9%, slightly underperforming its benchmark, the MSCI Europe (ex-UK) Small Cap Index, which returned 5.9%. MTE’s share price total return was 4.3%.
• The board highlights the longer-term track record of MTE, an outperformance of its benchmark by 23% over 5 years and 78.7% over 10 years.
• MTE endured headwinds over the first half of the year as growth and high-quality companies underperformed value and low-quality stocks. However its performance improved in the second half as these headwinds subsided.
• The top contributors to MTE’s returns were TOSS Software, a developer of workforce management software; VZ Holding, a financial consultant and wealth manager; and CTS Eventim, a ticketing company.
• At an underlying level, MTE’s portfolio companies delivered double-digit earnings growth and high returns on capital in the year.
• Looking forward MTE’s manager is confident about the future, citing attractive valuations for European small caps on both absolute and relative bases.
• MTE’s discount widened slightly over the year, from 13.1% to 13.7%.
• A final dividend of 0.90p per share was proposed, bringing the total dividend for the year to 1.125p, a 16% increase over the previous year.

MTE chairman, Richard Curling, commented:

“As reported in our Interim Results, European SmallCap valuation indicators remain at levels significantly below their long-term average. Since the peak in August 2020, the forward P/E of SmallCaps in Continental Europe has fallen from over 23x to around 13x at the end of March 2024. This de-rating means they sit at a discount to their long-term history, as shown in the chart on page 3 of the Annual Report. Moreover, European SmallCap is valued at a discount to the wider market, which is unusual. Indeed, the discount is at a level last seen in the depths of the Global Financial Crisis.

“Over the long term, we believe that earnings are the most important driver of share prices. In 2023, the average company in your portfolio grew its earnings by double digits and delivered high returns on capital. This, combined with attractive absolute and relative valuations for the asset class, means that we look forward to the future with confidence.”