EuropeanNov 16 2015

Fund Review: Jupiter European Opportunities Trust

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Alexander Darwall’s investment trust scooped the award for European Equity Fund of the Year at the Investment Adviser 100 Club Awards 2015 in October.

The manager took over the portfolio in 2000 when the Jupiter European trust was merged with the current vehicle. His objective is long-term capital growth by investing in firms quoted on a European stock exchange.

Mr Darwall explains he runs a concentrated portfolio of between 30 and 35 holdings, where stocks are held for the long term so turnover in the trust is fairly low.

“I am primarily a stock picker who looks for a very specific type of company,” he says. “These firms will tend to have a strong management record and team, proprietary technology and other factors that indicate a sustainable competitive advantage, a reasonable expectation that demand for their products or services will enjoy long-term growth and an understanding that structural changes are likely to benefit rather than negatively impact that company’s prospects.”

Macroeconomic factors rarely come into play as the manager prefers to take a purely bottom-up approach to selecting stocks for his portfolio. He says: “My research work is done at a micro level through direct company contact. My team and I meet more than 130 firms yearly and I form my own view rather than relying on market sentiment towards those companies.”

In spite of the vehicle’s low turnover, Mr Darwall has made some recent changes, noting that cruise company Royal Caribbean is his “most significant new holding”.

He explains: “A favourable industry structure and a good long-term record underpin our confidence in its business model. The development of the Chinese cruise market represents a potentially huge opportunity and there are realistic grounds for optimism. Other purchases include Spanish company Grifols, which manufactures and markets plasma derivatives. Its market structure is favourable, demand is growing, there is product innovation and it is well rewarded.”

Investors may want to note that an ongoing charge of 1.09 per cent applies to this trust.

As its victory at the 100 Club Awards suggests, this trust has delivered strong outperformance, both this year and longer term. In the past 12 months, the vehicle has withstood volatile markets to deliver 28.5 per cent, beating the Association of Investment Companies Europe sector average return of 11.3 per cent, data from FE Analytics shows . Across 10 years to November 5, the trust has generated an even more impressive return of 314.1 per cent, versus an average of 150 per cent delivered by the sector.

Mr Darwall points out a relatively low portfolio turnover – just 14 per cent in the past financial year – is often an indication that investments have performed satisfactorily. It seems the past year was no exception, with lender Provident Financial, structured products company Leonteq, stock exchange services provider Deutsche Börse and small ticket leasing firm Grenkeleasing among those that have contributed positively to performance.

“They are beneficiaries of the new regulatory and market challenges faced by the mainstream banks,” he says. “Capital constraints, higher regulatory costs and antiquated cost bases are some of the problems faced by the mainstream banks, yet demand for financial services – basic lending, for instance – remains. This represents a considerable opportunity for newer companies that are unencumbered by these legacy burdens.”

The manager adds: “A second group – Wirecard, Ingenico and Inmarsat – are ‘winners’ from digital opportunities. The first two are leaders in digital payments where there is a great deal of innovation, including mobile payments. Inmarsat is a world leader in mobile satellite services and should benefit from increasing maritime connectivity.”

Mr Darwall also identifies healthcare provider Fresenius, Novo Nordisk (diabetes treatment), Reed Elsevier (now Relx) and luxury eyewear manufacturer Luxottica as contributing to outperformance. “These businesses were tested by tougher conditions in emerging markets and yet they flourished. This contrasts with the experience of firms in other sectors, such as luxury goods and pharmaceuticals operating in China, where conditions became much more challenging.”

EXPERT VIEW

Juliet Schooling Latter, director of research, Chelsea Financial Services

We rate Alexander Darwall very highly and have the open-ended version of this trust on our buy list. His approach is simple and he generates his own ideas, primarily through meetings with company management teams, to look for evidence of successful, proven business models being implemented by open and honest management teams. He has developed a real aptitude for recognising patterns of success in company business plans. This skill, combined with his patient and value-aware approach, has resulted in consistent performance over the past 15 years. The only issue with this trust for me is that, with the performance fee added, the ongoing costs are currently extremely high at 3.92 per cent.