It’s now clear the UK economy is doing relatively well compared to Europe rather than falling behind, as was previously thought. However, in stock market terms, Europe remains the leader.
Over the past five years, the UK’s FTSE All Share index has returned 20% while the FTSE Europe ex-UK index has returned 40%. As a result, Europe ex UK still accounts for around 12% of the MSCI All Countries World index while the UK has sunk to just 3.5%.
Europe’s winners
Europe has outperformed as its leading companies have prospered on the world stage. Novo Nordisk recently overtook LVMH as Europe’s largest company, thanks to a recent study showing that its slimming drug, Wegovy, had a significant cardiovascular benefit. Novo Nordisk’s share price has tripled in the last three years while LVMH’s has merely doubled.
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Meanwhile, the market value of ASML, which supplies high-tech equipment to the world’s semiconductor producers, has multiplied more than seven-fold in the last ten years while Europe’s long-established giants, Nestle, Roche and, to a lesser extent, Novartis have been solid performers.
These winners show it’s hard to ignore Europe if you’re looking for the best companies. Brian Chingano of Verdad Research notes that “after decades of outperformance by the US relative to international markets, capital has flooded into the US market while largely shunning international markets.”
Company profitability, both in terms of gross profit and of cash flow relative to assets, is significantly higher in Europe than in North America, yet “the European market trades at a price/book ratio of 1.9 compared with 3.9 in North America.” “We believe that the combination of historically wide valuation spreads in Europe and higher levels of profitability bolsters the case for significant outperformance of European value stocks,” he concludes.
Therefore, there’s a good case for buying Europe-focused investment trusts and there’s a good selection of well-managed trusts trading at discounts to net asset value (NAV) to choose from.
Top trusts
The largest is Fidelity European (FEV) with £1.7bn of assets. It trades on a 5% discount and yields 2.3%. The top three holdings, Nestle, Novo Nordisk and ASML account for 17% of the portfolio and unlike other funds, it’s a little less growth-orientated with financials accounting for 22% and French energy major Total the fifth largest holding at 4.6%. The five-year total return is 70%.
BlackRock Greater Europe Trust (BRGE) has assets of £590m and trades at a discount of 4%. Novo Nordisk, LVMH and ASML are its largest holdings, accounting for 23% of the portfolio and it’s clearly focused on growth with no energy exposure. It does have some exposure to the UK - RELX is its fourth-largest holding. Over the past five years, the trust has returned 53% including income, and it currently offers a yield of 1.2%.
Two Henderson Trusts, European Focus (HEFT) with £340m of assets and Eurotrust (HNE) with £290m, trade on 11% and 12% discounts respectively and both yield nearly 2.8%. They are both growth-focused but have different portfolios; HEFT has 27% in industrials while HNE has 19% in healthcare. They’ve returned 46% and 42% respectively over the past five years.
JP Morgan European Growth & Income (JEGI), with £400m of assets and trading on a 10% discount, has the highest yield at 4.4% without the obvious corollary of a bias to value. Its shares trade on an 11% discount but have returned 41% over five years.
The tail-enders, European Trust and Baillie Gifford European (both once sector darlings) have been dismal performers over the last five years but have the strongest bias to growth. Their fortunes may improve but it is probably best not to bet on them yet.
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