The portfolio, which sits alongside the JPMorgan European IT Growth trust, was established as a pan-European fund including the UK. But this was changed in March 2013 when the vehicle’s benchmark was changed to Europe ex UK to create a continental Europe focus.
Alexander Fitzalan Howard co-manages the trust alongside Stephen Macklow-Smith and Michael Barakos, and notes this has been the only change to its process since it was established.
He explains: “It is all about finding higher-yielding stocks that are fundamentally sound. We start with a very broad universe of around 1,200 stocks and we take from that the highest-yielding 30 per cent. That then becomes the subset where we do our fundamental work. We’re looking for companies where we can be confident about the sustainability of the yield.”
This includes analysing a number of balance sheet measures, as well as dividend cover and earnings revisions. But he adds: “Where we are worried about the sustainability of the dividend, we just cut it out completely. Then anything left in the pot, so to speak, we will own in the fund.”
Therefore the portfolio has a large number of holdings – about 220 – which the manager acknowledges is different to a number of other income trusts but is “absolutely by design”. He says: “We’re trying to minimise stock-specific risk. We know we will make mistakes, but when we do we don’t want [them] to have a big impact on the fund. If there’s a profit warning or a dividend cut or something, it’s not going to absolutely destroy us. That is quite a differentiating factor.”
The trust made its first appearance in the Investment Adviser 100 Club in 2015 and has delivered steady performance across one, three and five years, outperforming both the Association of Investment Companies Europe sector average and the MSCI Europe ex UK index.
The vehicle recorded a total return of 76.5 per cent for the five years to November 19 2015 compared with the index’s rise of just 29.9 per cent, while the sector average of 74.1 per cent has lagged slightly behind, data from FE Analytics shows.
The manager notes portfolio changes are “quite slow moving”, but generally the team has been “going a little bit less defensive and having a bit more exposure, particularly to domestic cyclicals” ahead of what is expected to be a rising interest rate environment.