Improved European sentiment boosts trusts performance

Europe is becoming an attractive place to invest again, with investors putting faith in governments’ fiscal responsibility and company balance sheets remaining strong, according to two trusts that have benefitted from strong European equities performance in the past year.

JPMorgan’s European Investment Trust had total growth share returns of 24.1 per cent and income share returns of 28.8 per cent, while F&C’s Global Smaller Companies trust made 26.6 per cent on its UK small cap portfolio and 21.4 per cent on the European portfolio.

“They are competing again in the world and moving towards, and into, budget and trade surpluses,” said Andrew Murison, chairman of JPMorgan European Investment Trust.

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“This does not guarantee positive markets in the short-term, but it reduces risk and is positive for market valuations in the long-run.”

F&C Global Smaller Companies fund manager Peter Ewins noted flows back into European equities over the last 12 months as investors have grown more comfortable with the macroeconomic environment.

“We have seen a re-rating of equities at the small cap end of the market particularly, so companies have been growing their profits but not by as much as 21.4 per cent, companies have been put on high multiples by investors buying more equities seeking returns on their cash.”

Stephen Macklow-Smith, a portfolio manager for JPMorgan’s European trust, said that European corporates have managed themselves well through this crisis.

“The best way to look at that is through the net income margins for quoted Europe, which seem to be troughing at the same time they peaked in previous cycles in the 1980s and 1990s,” he explained.

“From a balance sheet point of view you also find that access to credit has been relatively constrained, but also there’s a proactive desire on the part of companies to make themselves less reliant on banks.

“Balance sheets are in relatively good nick, there’s a great deal of free cash flow out there that’s being used to pay down debt.”

Over the next 12-24 months Mr Macklow-Smith expects an end of de-leveraging.

“Not necessarily re-leveraging, but both households and corporates will recycle cash flow into capital investment and consumption, which will be another incremental support to European growth.”