Brexit and the pandemic have given the EU the chance to take a significant step towards a federal Europe. The €750bn bailout of southern Europe, financed with long-term bonds issued by the EU, paves the way, according to Cedric Gemehl of Gavekal, “for an EU finance ministry able to issue debt, raise taxes and spend the proceeds in its own right”.
Risk is dwindling
The resultant “structural reduction of European risk... will be bullish both for eurozone risk assets and the euro”. Whether it is bullish for the EU economy is a moot point but, says Jamie Ross, manager of the £300m Henderson Eurotrust (LSE: HNE), “it follows a tough decade for Europe... The outlook for the next ten years is more attractive.”
Since Ross took over as manager in the second half of 2018, the trust’s strong record has improved further, with a return of more than 14% in the last year against a flat market.Ross invests in “compounders – growth companies with high and sustainable returns on capital – and improvers: where I think returns can improve more than the market. I’m not interested in cheap companies; I prefer companies that appear reasonably expensive.”
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The portfolio contains technology-enabled businesses such as Delivery Hero, a food-delivery business operating in 40 countries, Scout 24, “the German Rightmove”, and Zur Rose, the leading Swiss online pharmacy. Tech groups ASML, SAP, Atos and STM, together with Telecom Italia, are beneficiaries of the move towards working from home while the shift to sustainability is represented by DSM (nutrition & health), RWE (renewable energy) and healthcare companies Grifols, Roche and Novo Nordisk. Financials are covered by Munich Re, Deutsche Börse and internet investment group Prosus rather than banks. The shares yield 2.5% and trade on a discount to net asset value (NAV) of 11.5%.
A boost from Baillie Gifford
The £440m Baillie Gifford European Growth Trust (LSE: BGEU) has generated even better returns. After Baillie Gifford’s appointment as managers in November last year, Stephen Paice and Moritz Sitte quickly shifted from a doomed value style to growth investing. One-year returns are already up to 23%. As in other Baillie Gifford trusts, the portfolio is tech-heavy with Prosus, Spotify and online fashion retailer Zalando topping the list. But holdings in Atlas Copco, Ryanair, Adidas and L’Oréal show that the new economy doesn’t dominate the portfolio. The growth focus means that any final dividend is likely to be small while the shares trade on a discount of 4.5%. This may be the lowest in the sector but it is generous given recent performance.
The collapse of Wirecard has been hugely damaging to the reputations of Europe’s technology sector, Germany’s financial regulators and Alex Darwall, manager of the £960m European Opportunities Trust (formerly Jupiter European). He was once the star performer in the sector but stubbornly ignored warnings from the Financial Times and KPMG about Wirecard, which accounted for 10% of JEO. Hopefully, he has learned his lesson and performance will recover.
The leading performer over five years at 89% is the £370m BlackRock Greater Europe (LSE: BRGE). The largest fund in the sector at £1.1bn, Fidelity European Values (LSE: FEV), has also done well. Both have portfolios orientated towards growth and global brands but low exposure to banks and resources.
This means that there is little diversity of style across the sector and many of the investments are held by several if not all trusts. Should the pendulum swing back to value and recovery, investors across the sector have to hope that their managers see it coming.
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