Launched in August 2006, this £122m trust aims to beat its MSCI Europe ex UK index benchmark by seeking long-term capital growth, with an above-market and increasing yield.
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.
Changes include moving more overweight the media sector, by adding to positions in some French media stocks, such as Vivendi, and increasing the underweight to pharmaceuticals by selling Novartis. Mr Fitzalan Howard explains: “In most instances the higher-yielding bit of the market continues to do well [as interest rates increase]. But it is important to distinguish between the more cyclical and financial bits that do well and some of the more traditionally defensive – almost bond proxy – [parts] of the market that don’t do so well.”
This is reflected in the portfolio, with the manager noting the trust is overweight financial sectors, including banks and insurance – which should benefit from rising rates. “We feel we should still be able to perform quite well if we’re exposed to the cyclical and financial areas,” he adds.
Meanwhile, he attributes part of the trust’s performance to avoiding some of the big underperformers in the market, including the large Spanish banks – such as Santander and BBVA – and German car manufacturer Volkswagen. “It comes back to only investing in sustainable yield stocks and getting rid of the ones that might be considered dividend or value traps,” he says.
“That definitely contributed quite a lot. In terms of what went well, we own [German reinsurance company] Hanover RE in the insurance sector, while in telecoms we have exposure to mobile virtual network operator Drillisch, which has no capital expenditure burden and so it can distribute its free cashflow.” On the flip side, the manager points out the trust did suffer by not owning certain stocks that have performed well, such as Danish pharmaceutical firm Novo Nordisk and Spanish retailer Inditex. But he adds: “These are stocks that we don’t normally own because they don’t yield enough for this portfolio.”
EXPERT VIEW
Richard Philbin, chief investment officer, Harwood Multi-Manager
This is a broadly diversified portfolio in terms of holdings, yielding just shy of 3.75 per cent – with dividends paid quarterly. Managed by Stephen Macklow-Smith, Alexander Fitzalan Howard and Michael Barakos, the trust’s share price and net asset value have comfortably beat the benchmark in the longer term, and particularly so this year. Yet the vehicle sits on a discount to net asset value. With more than one-third of the total assets in financials, be aware of specific sector-concentration risk. The top-10 holdings account for less than 20 per cent of the total assets.
