"Roll up that map of Europe; it will not be wanted these ten years," William Pitt presciently advised in January 1806 after hearing of the French victory at Austerlitz. At the time of the eurozone crisis in 2011-2012, many investors were also tempted to forget about investing in Europe, expecting its economy and markets to be hobbled indefinitely. That would have been a terrible mistake, although growth only started to pick up in 2016, equity markets have been gaining momentum for some time.
Small caps prove their worth
Last year was a great one for European larger companies and an even better time for small caps. The respective MSCI indices for Europe (excluding the UK) in sterling returned 16.7% and 25.8%, while the MSCI World index returned 12.4%. This outperformance by smaller companies was no fluke. It has averaged more than 7% in the past five years, meaning that while European large caps have lagged global indices by about 3% a year, the performance of smaller caps has been nearly 4% ahead.
The two leading investment trusts in this area have done even better. The £770m JP Morgan European Smaller Companies Trust (LSE: JESC) beat the index by 3% last year and 2% on average over the past five years, while the £630m TR European Growth Trust (LSE: TRG) was 6% ahead in 2017 and 4.3% ahead on average since 2012.
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Unsurprisingly, the generous discounts to asset value (the value of the underlying portfolio) at which their shares once traded have fallen, which means the share prices have done even better: JESC has returned 175% over five years and TRG 202%. The latter now trades at a premium, but the former is still on an 8% discount.
The outlook is good
This might seem like an opportunity to take profits, but Kieran Drake of brokers Winterflood disagrees. "While the case for investing is now more finely balanced than a year ago," he says, "the sector offers strong earnings growth at valuations that do not appear stretched relative to other markets". The earnings forecasts of investment analysts support this view. European small and mid-caps are expected to grow earnings by 20.3% in 2018 after rising 14.6% in 2017.
This would bring valuations down from 20.7 times earnings to well below the historic average of 18.7, while the competitive returns from banks and government bonds will remain derisory by historic standards. That both funds, particularly TRG, have borrowed to invest shows that their managers share this view.
Ollie Beckett, manager of TRG since 2011, describes himself as "cautiously optimistic; the outlook is good, Europe is strong and has the potential to catch up with other developed economies". More than half of the portfolio is invested in companies with a market value below £1bn, but with 140 holdings, risk is well spread. The managers of JESC take a similar view.
It is very unlikely many private investors will have heard of any of the companies that make up the top-ten holdings of either trust. TRG's largest holding is Van Lanschot Kempen, "the oldest independent bank in the Netherlands".
A few more may have heard of Amplifon, JESC's largest holding based in Italy, it is a world leader in the supply of hearing aids. But that is the point. These trusts buy firms that are outside the awareness of most investors yet look likely to deliver great returns. Fears of the death of Europe have been greatly exaggerated.
Two US-based activist investors have sold their $2.5bn stake in Swiss chemicals company Clariant, just three months after breaking up a proposed $15bn merger with rival Huntsman, says Paul Davies in The Wall Street Journal. Despite having claimed to have "better plans" for the company and to be "in it for the long haul", the two activist funds, which worked under the name White Tale, have now sold their near-25% stake to Saudi Arabia's state-backed chemicals company, Sabic.
The activists bought most of their Clariant shares at prices between CHF21 and CHF25, selling the stock at a 15-year high of more than CHF29. The share price dropped 10% on the news after Sabic said it had no plans to pursue a takeover.
Short positions... convenience for bitcoin owners
HICL Infrastructure Company is expecting to write off up to £50m of net asset value (the value of its underlying portfolio) as a result of Carillion's liquidation, says Rebecca Smith for City AM. The investment trust had previously announced that ten projects in its portfolio had facilities-management subcontracts with Carillion subsidiaries, with the collapse of the support-services company triggering loan-agreement defaults at most of these.
However, HICL's board is "confident enough" not to change its dividend guidance for the current year and the next two financial years, said the firm. Shares in HICL fell by a further 4% on the news (having already fallen since the beginning of last month), but have since rebounded.
Shares in the Grayscale Bitcoin Investment Trust went up by more than 8% after the fund's 91-for-1 stock split took effect, reports Bloomberg. As part of the split, shareholders received 90 more shares for each share they owned beforehand. While firms rarely split their shares into so many pieces, it is a "convenient event for people who follow it closely", says the Motley Fool. Each share of the investment trust used to represent ownership of about 0.0918 bitcoins. After the split, shares represent a rounder figure of around 0.001 bitcoins each, making the "mental math of knowing what the trust should be worth a lot easier".
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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