The Henderson Euro Trust finds value in Continental equities, says Max King.
“There is an implicit assumption among investors that membership of the EU and adoption of the euro currency are good for a country’s equity markets,” says Brian Chingono of Verdad Capital. Hence good equity performance in Europe last year was widely attributed to a pick-up in growth and greater political stability. This year, negative performance by the MSCI Europe ex-UK index, and 25 straight weeks of fund outflows, have been blamed on a weakening economy and fears of instability.
Verdad’s analysis, however, shows an annualised return of 8.4% between 1994 and 2017 from the equities of EU members, and 9.8% from non-EU members. The returns from the former broke down to 8.1% for those that adopted the euro currency and 9.4% for those that didn’t. While this implies that membership of the EU, and especially adoption of the euro, were actually negative for market returns, Chingono notes that the differences are not statistically significant. “Investors should spend less time thinking about political unions and single currencies and more time focused on finding cheap equities.”
This is just the way Tim Stevenson, manager of the £266m Henderson Euro Trust (LSE: HNE), thinks. “I hate the macro and having to talk about it,” he says. “I prefer to talk about stocks.” He has managed the trust since its launch in 1992, returning a compound 14.5% (with dividends reinvested) in sterling, compared with a sector average of 12.9% and 9.9% for the benchmark. Moreover, performance has been ahead of benchmark over one, three, five and ten years, as well as over 25. The shares, nonetheless, trade on a 9% discount to net asset value and yield 2.3%.
Plenty of opportunities
This year Europe has lagged, despite better economic performance over the past few years. It has a mature economy, which means 1.5% to 2% growth is really good, but there are still plenty of investment opportunities, says Stevenson. He has no doubt that valuations have been held back. “The unstable alliance in Italy has warned off investors for now, but… the problem is sentiment rather than fundamentals.”
This is backed up by Stevenson’s estimate of 14.9% earnings growth on 5.4% revenue growth for the coming year, both slightly ahead of the index. The three-year historic averages are 14.5% and 5.8%, comfortably ahead of the index. Turnover of the 46-stock portfolio, at around 45% but more this year, is fairly active. Stevenson is looking for companies with organic sales growth of 3% to 4%, plus the potential for bolt-on acquisitions and margin improvement. With a 2% dividend yield, this means a target return of roughly 10% – less than achieved in the past, but still considerable.
A global focus
Many of the companies have a global rather than a European focus. Inditex, the Spanish owner of retailer Zara, is seeing 4% like-for-like sales growth in euros, and just 17% of its sales come from Spain. Deutsche Post delivers mail and parcels in Germany but also owns DHL, which has 45% of the market for express deliveries and associated logistics in Asia.
The portfolio also includes world-leading tech firms such as B2B software producer SAP, semiconductor company ASML and travel technology business Amadeus, as well as DSM, a former industrial conglomerate restructuring its business, and Amundi, one of Europe’s top fund management firms. Long-term savings is a huge growth market, yet the latter’s shares are priced on just 12-13 times earnings and yield 4%.
Stevenson doesn’t look at the country breakdown of the portfolio as “it tells me nothing”. Investors should follow his and Chingono’s lead – ignore the politics and buy into a cheap market.