Four investment trusts that should profit from the EU's Great Leap Forward

Debt issuance by Brussels makes the euro more stable and bodes well for risky assets. These four investment trusts should profit.

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.” 

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.

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
19 Feb 2021
Where to find deep value in investment trusts
Share tips

Where to find deep value in investment trusts

Professional investors Nick Greenwood and Charlotte Cuthbertson of the Miton Global Opportunities trust pick three of their favourite investment trust…
15 Feb 2021
European stockmarkets will bounce back
European stockmarkets

European stockmarkets will bounce back

Last year was one to forget for European stockmarkets. But 2021 should prove better.
8 Jan 2021
Why investment trusts are the connoisseur’s choice of fund
Investment trusts

Why investment trusts are the connoisseur’s choice of fund

Investment trusts have justified their reputation as the best type of collective investment in 2020, says Jonathan Davis.
7 Dec 2020

Most Popular

A beginner’s guide to bitcoin: what is bitcoin?
Bitcoin

A beginner’s guide to bitcoin: what is bitcoin?

As a completely novel concept for many people, bitcoin can take a little effort to get to grips with. In the first of a short series on the cryptocurr…
1 Mar 2021
A beginner’s guide to bitcoin: how to buy bitcoin
Bitcoin

A beginner’s guide to bitcoin: how to buy bitcoin

For the novice, buying bitcoin can be a daunting prospect. Here, Dominic Frisby outlines the process from start to finish.
2 Mar 2021
What is “yield curve control” and why is it coming to a central bank near you?
Government bonds

What is “yield curve control” and why is it coming to a central bank near you?

Central banks around the world are determined not to let interest rates go up too quickly or by too much – a practice known as “yield curve control”. …
1 Mar 2021